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The Circular City with Heterogeneous Firms

The paper extends the Salop model of localized competition by allowing firms to have heterogeneous costs. We provide a general but highly tractable analytical solution for the equilibrium prices, and we study the long-run properties of the model using two different entry games. We show that cost heterogeneity affects the efficiency of the market equilibrium by increasing welfare and inducing less excessive entry. Further, we illustrate the positive effects of the existence of a selection mechanism, which induces less efficient firms not to start production. The model also replicates some recent results on dense markets.

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File URL: http://www.lboro.ac.uk/departments/ec/RePEc/lbo/lbowps/circle_city_WP_Lboro.pdf
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Paper provided by Department of Economics, Loughborough University in its series Discussion Paper Series with number 2008_03.

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Date of creation: Jul 2008
Date of revision: Jul 2008
Handle: RePEc:lbo:lbowps:2008_03
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Loughborough, Leicestershire, LE11 3TU

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Fax: +44 (0) 1509 223910
Web page: http://www.lboro.ac.uk/departments/sbe/research/economics/index.html

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  1. Catherine Schaumans & Frank Verboven, 2008. "Entry and regulation: evidence from health care professions," RAND Journal of Economics, RAND Corporation, vol. 39(4), pages 949-972.
  2. Claudio A. Piga, 1998. "A Dynamic Model of Advertising and Product Differentiation," Review of Industrial Organization, Springer, vol. 13(5), pages 509-522, October.
  3. Volker Nocke, 2003. "A Gap for Me: Entrepreneurs and Entry," PIER Working Paper Archive 03-019, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  4. Bhaskar, V & To, Ted, 2002. "Is perfect price discrimination really efficient? An analysis of free entry," Economics Discussion Papers 8840, University of Essex, Department of Economics.
  5. Qihong Liu & Konstantinos Serfes, 2005. "Imperfect price discrimination, market structure, and efficiency," Canadian Journal of Economics, Canadian Economics Association, vol. 38(4), pages 1191-1203, November.
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