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The Circular City with Heterogenous Firms

  • Marco Alderighi

    ()

    (Universita' della Valle d'Aosta)

  • Claudio A. Piga

    ()

    (Loughborough University Economics Department)

The paper extends the Salop model of localized competition by allowing frms 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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Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 16-08.

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Date of creation: Jan 2008
Date of revision: Jan 2008
Handle: RePEc:rim:rimwps:16-08
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  1. Spulber, Daniel F, 1995. "Bertrand Competition When Rivals' Costs Are Unknown," Journal of Industrial Economics, Wiley Blackwell, vol. 43(1), pages 1-11, March.
  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. 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.
  4. 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.
  5. Eaton, B Curtis & Lipsey, Richard G, 1978. "Freedom of Entry and the Existence of Pure Profit," Economic Journal, Royal Economic Society, vol. 88(351), pages 455-69, September.
  6. Rothschild, R, 1982. "Competitive Behaviour in Chain-Linked Markets," Journal of Industrial Economics, Wiley Blackwell, vol. 31(1-2), pages 57-67, September.
  7. Mark Doms & Eric J. Bartelsman, 2000. "Understanding Productivity: Lessons from Longitudinal Microdata," Journal of Economic Literature, American Economic Association, vol. 38(3), pages 569-594, September.
  8. Anderson, Simon P. & de Palma, Andre, 2000. "From local to global competition," European Economic Review, Elsevier, vol. 44(3), pages 423-448, March.
  9. d'ASPREMONT, Claude & GABSZEWICZ, Jean J. & THISSE, Jacques-François, . "On Hotelling's "Stability in competition"," CORE Discussion Papers RP -385, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  10. Waterson, Michael, 1990. "Product Differentiation and Profitability: An Asymmetric Model," Journal of Industrial Economics, Wiley Blackwell, vol. 39(2), pages 113-30, December.
  11. 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.
  12. Michael H. Riordan & Yongmin Chen, 2005. "Price and Variety in the Spokes Model," Discussion Papers 0405-20, Columbia University, Department of Economics.
  13. Aiura, Hiroshi & Sato, Yasuhiro, 2008. "Welfare properties of spatial competition with location-dependent costs," Regional Science and Urban Economics, Elsevier, vol. 38(1), pages 32-48, January.
  14. von Ungern-Sternberg, Thomas, 1991. "Monopolistic Competition on the Pyramid," Journal of Industrial Economics, Wiley Blackwell, vol. 39(4), pages 355-68, June.
  15. Joris Pinkse & Margaret E. Slade & Craig Brett, 2002. "Spatial Price Competition: A Semiparametric Approach," Econometrica, Econometric Society, vol. 70(3), pages 1111-1153, May.
  16. Bester, Helmut, 1992. "Bertrand Equilibrium in a Differentiated Duopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(2), pages 433-48, May.
  17. Anthony Creane, 2007. "Note on uncertainty and socially excessive entry," International Journal of Economic Theory, The International Society for Economic Theory, vol. 3(4), pages 329-334.
  18. Montagna, Catia, 1995. "Monopolistic Competition with Firm-Specific Costs," Oxford Economic Papers, Oxford University Press, vol. 47(2), pages 318-28, April.
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