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The Circular City with Heterogeneous Firms

38 Pages Posted: 15 Jul 2008  

Marco Alderighi

Università della Valle d'Aosta; Bocconi University

Claudio A. Piga

Keele University - Keele Management School

Date Written: July, 13 2008

Abstract

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.

Keywords: Localized competition, market efficiency, cost heterogeneity

JEL Classification: L11, D61

Suggested Citation

Alderighi, Marco and Piga, Claudio A., The Circular City with Heterogeneous Firms (July, 13 2008). Available at SSRN: https://ssrn.com/abstract=1159381 or http://dx.doi.org/10.2139/ssrn.1159381

Marco Alderighi

Università della Valle d'Aosta ( email )

Strada dei Cappuccini 2/A
Aosta, 11100
Italy

Bocconi University ( email )

Via Sarfatti 25
20136 Milan, MI 20136
Italy

Claudio A. Piga (Contact Author)

Keele University - Keele Management School ( email )

Darwin Building
Staffordshire, ST5 5BG
United Kingdom

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