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Why Should a Firm Choose to Limit the Size of its Market Area?

We study when a monopolistically-competitive firm may optimally choose to limit the size of its market. This may be the case when the cost of serving the market with geographically dispersed customers is increasing in size. We also investigate the incentives faced by a firm to limit the reach of its market, when it adopts different pricing schemes. We show that under certain assumptions the derived equilibria are constrained socially optimal.

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File URL: http://www.lboro.ac.uk/departments/ec/RePEc/lbo/lbowps/Alderighi-Piga-2007_21.pdf
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Paper provided by Department of Economics, Loughborough University in its series Discussion Paper Series with number 2007_21.

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Date of creation: Aug 2007
Date of revision: Aug 2007
Handle: RePEc:lbo:lbowps:2007_21
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  1. Shaked, Avner & Sutton, John, 1987. "Product Differentiation and Industrial Structure," Journal of Industrial Economics, Wiley Blackwell, vol. 36(2), pages 131-46, December.
  2. James E. Rauch, 1996. "Networks versus Markets in International Trade," NBER Working Papers 5617, National Bureau of Economic Research, Inc.
  3. Kohlberg, Elon, 1983. "Equilibrium store locations when consumers minimize travel time plus waiting time," Economics Letters, Elsevier, vol. 11(3), pages 211-216.
  4. Anderson, Simon P & de Palma, André, 1996. "From Local to Global Competition," CEPR Discussion Papers 1328, C.E.P.R. Discussion Papers.
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  6. Piga, Claudio & Poyago-Theotoky, Joanna, 2005. "Endogenous R&D spillovers and locational choice," Regional Science and Urban Economics, Elsevier, vol. 35(2), pages 127-139, March.
  7. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  8. Laffont, Jean-Jacques & Tirole, Jean, 1990. "Optimal Bypass and Cream Skimming," American Economic Review, American Economic Association, vol. 80(5), pages 1042-61, December.
  9. McCallum, John, 1995. "National Borders Matter: Canada-U.S. Regional Trade Patterns," American Economic Review, American Economic Association, vol. 85(3), pages 615-23, June.
  10. James E. Anderson & Eric van Wincoop, 2001. "Borders, Trade and Welfare," NBER Working Papers 8515, National Bureau of Economic Research, Inc.
  11. Gene M. Grossman & Carl Shapiro, 1984. "Informative Advertising with Differentiated Products," Review of Economic Studies, Oxford University Press, vol. 51(1), pages 63-81.
  12. Chaug-Ing Hsu & I-Jin Tsai, 1999. "articles: Logistics cost, consumer demand, and retail establishment density," Papers in Regional Science, Springer;Regional Science Association International, vol. 78(3), pages 243-263.
  13. Gianmarco I. P. Ottaviano & Diego Puga, 1998. "Agglomeration in the Global Economy: A Survey of the 'New Economic Geography'," The World Economy, Wiley Blackwell, vol. 21(6), pages 707-731, 08.
  14. Oliver D. Hart, 1985. "Monopolistic Competition in the Spirit of Chamberlin: A General Model," Review of Economic Studies, Oxford University Press, vol. 52(4), pages 529-546.
  15. Hsu, Song-ken, 1979. "Monopoly Output under Alternative Spatial Pricing Techniques: Comment," American Economic Review, American Economic Association, vol. 69(4), pages 678-79, September.
  16. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December.
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