LOCATING OUTSIDE A LINEAR CITY CAN BENEFIT CONSUMERS

Authors


  • An earlier version of this paper was circulated under the title “Regional Restriction, Strategic Delegation, and Welfare.” We would like to thank Takanori Adachi, Kenichi Amaya, H. Reiju Mihara, Yoshiaki Sugimoto, Takatoshi Tabuchi, and seminar participants at Kagawa University, Tokyo Institute of Technology, and University of Tokyo for their helpful comments. The authors gratefully acknowledge financial support from Grant-in-Aid for Encouragement of Young Scientists and for Basic Research from the Japanese Ministry of Education, Science, and Culture. Needless to say, we are responsible for any remaining errors.

Abstract

ABSTRACT We investigate the effects of restricting the locations of firms in Hotelling duopoly models. In standard location-price models, the equilibrium distance between firms is too great from the viewpoint of consumer welfare. Thus, restricting the locations of firms and shortening the distance between them improves consumer welfare by reducing prices and transport costs. We introduce strategic reward contracts into location-price models and find that, in contrast to the above result, restrictions on the locations of firms reduce consumer welfare. These restrictions reduce transport costs but increase prices by changing the strategic commitments of the firms.

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