Monopolistic competition in interregional retail markets

We consider that heterogeneous firms take one of the following strategies: over-the-counter sales, multiple regions, and delivery in a monopolistically competitive market in a two-region economy. Our findings indicate that the most efficient firms choose to operate in multiple regions, the second most efficient firms choose to deliver, the third most efficient firms choose to sell over-the-counter to consumers in two regions, and the least efficient firms choose to sell over-the-counter to consumers in one region. We show that technological progress increases the share of multiregional firms whose headquarters are located in each region and that the social welfare is higher in a larger region, where a larger market size leads to greater product variety and lower prices. Through numerical simulations, we demonstrate that multiregional firms tend to locate in regions with smaller populations to avoid intense competition and that delivery via spatial price discrimination results in lower welfare than over-the-counter sales by mill pricing, contrary to the literature.