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price-taking agents
If one supposes two locations and wants to have trade between the locations, i.e., choose prices such that trade occurs then the rms would rather be where they are not
Two examples
1. the location of a consumer and a rm, each in an island; the rm sells the good to the consumer who works for the rm
2. the location of a rm which serves the two islands (produces in one, serves both)
1. the consumer would maximize her utility by moving to the island where the rm is located; the rm would maximize its prot by moving to the island where the consumer is located
2. the rm would maximize its prot by locating in the island where it is not
so that there is no location equilibrium the competitive paradigm cannot tell us a nice story about location! Staretts impossibility theorem (1978)
the rm produces one unit of a given good, which it sells to the consumer
is the travel cost of the good and the consumer (the boat ticket)
the way to proceed is to suppose that the consumer lives in A and the rm produces in B
and show that the consumer would rather live in B and the rm would rather live in A
The consumer
yA = w p rA = w p rA
yB = w p rB = w p rB
The consumer saves the boat ticket to go to work (and pays a possibly dierent rent)
The consumer wants to stay in island A if and only if her income is greater in island A
y = yA yB = + (rB rA ) > 0
The rm
B = p w rB
A = p w rA
The rm saves the boat ticket to ship the good to where the consumer lives (and pays a possibly dierent rent)
= B A = (rB rA ) > 0
Location equilibrium?
y > 0 rB rA >
but then
Location equilibrium?
Notice that if
land is not homogenous (e.g. the consumer enjoys a higher utility if she lives in one island)
if the rm locates in A, the prices p , p such that the rm wants to A B sell beer abroad are such that the rm prefers to relocate and move to B.
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A (xB ) = pA (X xB ) + pB xB C = pA X C + xB (pA + pB )
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pA + pB = 0 the rm is indierent between selling in A or B, hence any x [0, X] and x [0, X/ ] can be the optimal choice B A of the rm.
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From which
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dB pB dxA
<0
because > 1
Indeed,
pB X C > pA X C
because
pA /pB =
1 <1
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price-setting
heterogenous space
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