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Location Decisions in a Natural Resource Model of Cournot Competition

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  • Ricardo Biscaia

    () (Faculdade de Economia do Porto)

  • Paula Sarmento

    () (Faculdade de Economia do Porto)

Abstract

This article focuses on the location decision of firms when competing in a spatial Cournot duopoly. Our original contribution is that firms are dependent on a natural resource input, which is assumed to be located in one of the extremes of the market, to be able to produce the output sought by the consumers, and that natural resource is controlled by an independent monopolist. We solve a three stage location game, where in the first stage downstream firms choose their location, and in the next stages upstream and downstream choose how many quantities they sell in the market, assuming that downstream firms must sell their product in all points of the linear city. We conclude that downstream firms agglomerate independently of the unit input transportation cost. In addition, increases in the unit transportation cost bring the plants closer to the natural resource location. Moreover, the upstream firm loses more profit than the downstream firms when the input transportation conditions deteriorate. When we consider the problem of a social planner, we conclude that the location that firms choose is nearly the same than the location that maximizes total welfare in the economy.

Suggested Citation

  • Ricardo Biscaia & Paula Sarmento, 2013. "Location Decisions in a Natural Resource Model of Cournot Competition," FEP Working Papers 509, Universidade do Porto, Faculdade de Economia do Porto.
  • Handle: RePEc:por:fepwps:509
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    More about this item

    Keywords

    Spatial Competition; Vertical Markets; Duopoly Studies; Game Theory;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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