Regional restriction, strategic delegation, and welfare

Toshihiro Matsumura and Noriaki Matsushima

ISER Discussion Paper from Institute of Social and Economic Research, The University of Osaka

Abstract: We investigate the effects of restricting locations of firms into Hotelling duopoly models. In the standard location-price models, the equilibrium distance between firms is too large from the viewpoint of consumer welfare. Thus, restricting locations of firms and reducing the distance between firms improve consumer welfare, through lower prices and smaller transportation costs for consumers. We introduce strategic reward contracts into the location-price models. We find that in contrast to the above existing result, restriction of the locations of firms reduces consumer welfare. Restricting locations of the firms reduces transportation costs but increases the prices through the change of strategic commitments by the firms, and it yields a counterintuitive result.

Date: 2009-11
New Economics Papers: this item is included in nep-geo, nep-mic and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:dpr:wpaper:0761

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