Price and Variety in the Spokes Model
University of Colorado at Boulder - Department of Economics
Michael H. Riordan
Columbia University - Columbia Business School
Economic Journal, Vol. 117, No. 522, pp. 897-921, July 2007
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.
Number of Pages in PDF File: 25
Date posted: July 8, 2007