Spatial Competition with a Land Market: Hotelling and Von Thunen Unified

Masahisa Fujita and Jacques Thisse

The Review of Economic Studies, 1986, vol. 53, issue 5, 819-841

Abstract: We introduce into the standard spatial competition model the consumption of land by households, and study the spatial competition under the influence of a land market. In contrast to the standard assumption of a fixed, given distribution of households, we introduce the possibility of households' relocation in reaction to firms' location decisions. Thus, the spatial distribution of households is treated as endogenous, and a land market is introduced on which households compete for land-use. Households consume simultaneously land and firms' output. Accordingly, the demand of each household becomes in turn endogenous as it depends on the income left after the land rent is paid. Not surprisingly, the results obtained within this more general framework prove to be very different from the standard results. For example, in the 2- and 3-firm cases, the optimal configuration of firms is a Nash equilibrium when transport costs are high enough or the amount of vacant land is large enough. The existence property is restored in the 3-firm case when the transport costs are high enough. The introduction of vacant land causes a discontinuous change in the set of equilibrium configurations.

Date: 1986
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