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Market prices, spatial distribution of consumers and firms’ optimal locations in a linear city

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  • Raúl Bajo-Buenestado

    (University of Navarra
    Rice University)

Abstract

We study a game of spatial competition in prices. In particular, we focus on the linear-city duopoly model to see what we can learn about the distribution of consumers, which is not required to be uniform—as in the original Hotelling model. Using variation in firms’ prices and costs, we identify points of the distribution of consumers. Based on these points, we estimate the spatial distribution of consumers along the linear city. We apply our methodology to a dataset of prices of two gas stations on a straight highway. By estimating the distribution of consumers, we are able to find the optimal location of an entrant gas station. Using our estimated distribution of consumers and the entrant’s optimal point, we simulate welfare gains under counterfactual locations of an entrant.

Suggested Citation

  • Raúl Bajo-Buenestado, 2021. "Market prices, spatial distribution of consumers and firms’ optimal locations in a linear city," Empirical Economics, Springer, vol. 61(1), pages 443-467, July.
    • Handle: RePEc:spr:empeco:v:61:y:2021:i:1:d:10.1007_s00181-020-01871-x
    DOI: 10.1007/s00181-020-01871-x
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    More about this item

    Keywords

    Demand estimation; Linear-city model; Distribution of consumers; Spatial analysis; Regulated location; Spatial price competition;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)
    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location
    • R41 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Transportation: Demand, Supply, and Congestion; Travel Time; Safety and Accidents; Transportation Noise

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