Motelling: A Hotelling Model with Money

We apply a mechanism design approach to a trading post environment where the household type space (tastes over variety) is continuous and it is costly to set up shops that trade differentiated goods. In this framework, we address Hotelling's Hot venerable question about where shops will endogenously locate in variety space across environments with and without money. Money has a role in our environment due to anonymity. Our specific question is whether monetary exchange leads to more product variety than an environment without money (i.e. a barter economy). We show that an efficient monetary mechanism does in fact lead to more product variety available to households provided the discount factor is sufficiently high, costs of operating shops are sufficiently low, and there is sufficient heterogeneity in tastes and abilities. We then show how this allocation can be implemented in a trading post economy with money. The paper is an attempt to integrate monetary theory and industrial organization