Price and Variety in the Spokes Model

25 Pages Posted: 8 Jul 2007  

Yongmin Chen

University of Colorado at Boulder - Department of Economics

Michael H. Riordan

Columbia University - Columbia Business School

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.

Suggested Citation

Chen, Yongmin and Riordan, Michael H., Price and Variety in the Spokes Model. Economic Journal, Vol. 117, No. 522, pp. 897-921, July 2007. Available at SSRN: https://ssrn.com/abstract=998148 or http://dx.doi.org/10.1111/j.1468-0297.2007.02063.x

Yongmin Chen (Contact Author)

University of Colorado at Boulder - Department of Economics ( email )

Campus Box 256
Boulder, CO 80309-0256
United States
303-492-8736 (Phone)
303-492-8960 (Fax)

Michael H. Riordan

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States
212-854-6984 (Phone)

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