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Price and Variety in the Spokes Model

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Listed:
  • Yongmin Chen
  • Michael H. Riordan

Abstract

The spokes model of nonlocalised spatial competition provides a new analytical tool for differentiated oligopoly and a representation of spatial monopolistic competition. An increase in the number of firms leads to lower equilibrium prices when consumers have relatively high product valuations, but, surprisingly, to higher equilibrium prices for intermediate consumer valuations. New entry alters consumer and social welfare through price, market expansion, and matching effects. With free entry, the market may provide too many or too few varieties from a social welfare perspective, and the equilibrium price remains above marginal cost even when the number of firms is arbitrarily large. Copyright 2007 The Author(s). Journal compilation Royal Economic Society 2007.

Suggested Citation

  • Yongmin Chen & Michael H. Riordan, 2007. "Price and Variety in the Spokes Model," Economic Journal, Royal Economic Society, vol. 117(522), pages 897-921, July.
    • Handle: RePEc:ecj:econjl:v:117:y:2007:i:522:p:897-921
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