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.
|Date of creation:||Jul 2008|
|Date of revision:||Jul 2008|
|Contact details of provider:|| Postal: Loughborough, Leicestershire, LE11 3TU|
Phone: +44 (0) 1509 222701
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Web page: http://www.lboro.ac.uk/departments/sbe/research/economics/index.html
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- Claudio A. Piga, 1998. "A Dynamic Model of Advertising and Product Differentiation," Review of Industrial Organization, Springer, vol. 13(5), pages 509-522, October.
- Volker Nocke, 2006.
"A Gap for Me: Entrepreneurs and Entry,"
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MIT Press, vol. 4(5), pages 929-956, 09.
- 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.
- Volker Nocke, 2003. "A Gap for Me: Entrepreneurs and Entry," PIER Working Paper Archive 05-026, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 29 Sep 2005.
- 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.
- V. Bhaskar & Ted To, 2004.
"Is Perfect Price Discrimination Really Efficient? An Analysis of Free Entry,"
RAND Journal of Economics,
The RAND Corporation, vol. 35(4), pages 762-776, Winter.
- 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.
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