SPATIAL ENTRY DETERRENCE UNDER OLIGOPOLY*

ABSTRACT. This paper examines colluding, oligopolistic firms in a linear market. By assuming that rivals do not compete for consumers at their market boundaries, it is shown that an equilibrium exists without adopting a convex transportation cost function. Two price profiles are derived. The first describes firm prices in the absence of threatened entry. The second details profit-maximizing prices which forestall entrants. Given infinite relocation costs, threatened entry leads to price adjustments by the incumbent firms.     

Asymmetric Entrant Locaiton with a Discrete Consumer Distribution: Spatial Price Discrimination Versus Mill Pricing

In this paper I examine the profit-maximizing locations of entrants. Suppose that firms practice spatial price discrimination and consumer locations are discrete, such as five equally spaced towns on a roadway. With completely inelastic consumer demand an entrant between two existing firms is often indifferent between the symmetric (central) location and a continuum of asymmetric (noncentral) locations. However, downward-sloping consumer demand often causes the entrant to strictly prefer either of two asymmetric locations to any other location. These results are very different from those found in mill-pricing (free-on-board or f.o.b.-pricing) models.     

Price Variation in Spatial Oligopolies

The “geography of price” is being given renewed attention by geographers and economists. This paper examines spatial price variation in both unbounded (circular) and bounded (linear) one-dimensional markets. Firms compete for consumers in the short run by adjusting price until the Bertrand equilibrium is reached in the market. While firms act as spatial oligopolists in specific market segments, the profit-maximizing price of any given firm depends directly and indirectly upon the spatial-economic properties (locations, marginal costs) of all other firms in the market.     

OPTIMUM LOCATION AND THEORY OF THE FIRM UNDER A REGULATORY CONSTRAINT*

This paper attempts to incorporate space in the theory of a regulated firm. It will show that the A-J effects are not affected in a spatial setting. In addition, it will also demonstrate that as the difference between the regulated fair rate of return and the unconstrained profit-maximizing rate of return on capital becomes greater, the optimum location of the regulated firm moves towards the site of the product market, if capital and labor are complements (substitutes) and if marginal transportation costs (with respect to distance) are an increasing (decreasing) function of labor usage.     

REPLY TO SUBSIDIES, ADDITIONALITY AND FINANCIAL CONSTRAINTS

ABSTRACT. In Wren (1994) I find that industrial subsidies have significantly greater employment effects in small firms, and interpret this as arising from the poorer access that these firms have to private funds. Holden and Swales (1996) criticize this interpretation, arguing that financial constraints typically limit the effectiveness of subsidies. In this paper I show that their results arise from the particular properties of the homogeneous production function. More generally, I show that the effectiveness of assistance increases with the marginal cost of private funds and is greater in those firms facing financial constraints. As such, differential access to private funds can explain the greater effectiveness of assistance found in small firms.     

SPATIAL PRICE POLICY AND THE DEMAND FOR TRANSPORTATION

For a spatial market of given radius transportation cost per unit sold is less under mill pricing than under any uniform pricing. This is true whether profit-maximizing monopoly prices or welfare-maximizing prices or any other prices are chosen.     

BRAIN CIRCULATION AND FLEXIBLE ADJUSTMENT: LABOUR MOBILITY AS A CLUSTER ADVANTAGE

This article explores the role of labour mobility as a potential cluster advantage. We review the theoretical arguments as for how and why labour mobility could enhance the dynamism and performance of clusters of similar and related firms. A combination of quantitative and qualitative data from two information and communication technology (ICT) clusters is used to answer two research questions: (1) What is the role of mobility enhancing (or restricting) institutions in clusters? and (2) In what ways does labour mobility contribute to knowledge transfer within clusters? The two ICT clusters studied in the article generally seem to have higher levels of mobility, compared to the labour market at large. Although it is regarded as beneficial in theory, most cluster firms try to restrict mobility of workers since they fear the risk and costs of losing staff. Labour mobility is also rarely viewed as a viable way to increase the knowledge bases or contact networks of firms. However, when firms need to recruit the clustered labour markets seem to benefit them by facilitating the use of informal recruitment processes. By way of conclusion it is suggested that cluster firms might be under‐investing in mobility and that innovative institutional solutions could help realize clusters' mobility potential.     

SPATIAL PRICING IN INTERDEPENDENT MARHETS*

ABSTRACT. Conditions for spatial price equilibrium are derived for a set of firms in oligopolistic spatial competition, distributed at fixed locations in a heterogeneous region where consumer purchasing patterns are a probabilistic function of the price distribution rather than a deterministic function of proximity to firms. The resulting prices vary with accessibility to consumers or with the degree of local spatial monopoly, and result in non-zero profits for firms. Conditions describing the existence and stability properties of this spatial price equilibrium are defined, and are shown to be equivalent for two different hypotheses concerning disequilibrium pricing behavior: a partial price adjustment model and a Bertrand game. For two different profit goals, total profit maximization and profit rate maximization, it is shown that a spatial price equilibrium exists and is at least locally quasi-stable.     

SPATIAL COMPETITION AND THE JOINT CONSUMPTION OF SERVICES*

In Hotelling location models, an implicit assumption has been made that a customer uses the service provided by the firm, independent of other customers. However, for firms that supply meeting rooms, wedding halls, tennis courts, and golf links it is essential to incorporate the fact that the customer only uses the service in conjunction with other customers. The objective of this paper is to formulate the Hotelling location model n consideration of the interdependence among customers in one-dimensional space, and to characterize the state of equilibrium. In our model, each group of members within a given distance enjoys a fixed amount of service of the firms, under the assumption that the travel cost incurred by each group is defined as the travel cost of the farthest customer in the group.     

A SPATIAL COMPETITION APPROACH TO CENTRAL PLACE THEORY: SOME BASIC PRINCIPLES*

ABSTRACT. This paper investigates the potential offered by the model of spatial competition for the study of central place theory. We consider n firms selling m substitutable or complementary goods to a continuum of consumers evenly distributed along a linear segment. Consumers have the same income and the same utility function which is quadratic in the goods supplied by the firms and linear in the numeraire. The main results are as follows. (1) In any location equilibrium in which all goods are consumed everywhere, each good supplied by a single firm is sold at the market center. In Christaller's terminology, this means that when the exhaustive principle holds in equilibrium, highest-order goods are made available at the center. (2) When all goods (excluding the numéraire) are complements to each other and each good is sold by a single firm, there always exists an equilibrium in which all the firms locate coincidentally. (3) If the stores selling a given good are under the control of a single owner then, in any equilibrium for which the exhaustive principle holds, the stores are located in a way such that the total transport cost (borne by consumers) is minimized.     

Marketing as Diffusion in a Single Population

The paper examines the optimal advertising policy for a profit-maximizing firm in a single market area. The results are first derived for a spaceless market, indicating the steady-state equilibrium advertising policy and market size. The model is then extended to account for the costs of overcoming distance. It is shown that there is an outward limit to marketing, and that this distance is dependent on the market price and retirement rate of the good and the interest rate. The minimal price necessary for covering any given distance is derived, along with the minimal advertising effort necessary to reach the steady-state market size. It is shown that the steady-state market size, advertising policy, and switching time are all monotonic functions of distance.     

A THEORETICAL FRAMEWORK FOR SMALL BUSINESS POLICY

A number of public policy issues have been discussed in this article, the most important of which are: 1. Small business would not need special consideration if our economy were basically a competitive one. 2. A large and growing segment of our economy has sufficient market and political power to make our economy basically non-competitive. 3. Small firms tend to provide price competition, to lead in the development of new products and processes, and to generate new innovations and new employment. 4. Government policy tends to create artificial economies of scale, giving an unwarranted advantage to the very large firm. As a first approximation, a policy of government neutrality on firms of varying size is needed. But, because of discriminations which already exist which favor large firms over small firms, special small business programs may be necessary to provide an equitable policy base. Unfortunately, programs designed to benefit all business, like the investment tax credit, tend to primarily benefit larger firms (Berney, 1979). This is the case for two reasons. First, there is a basic difference in production relationships: large firms tend to be more capital intensive and small firms more labor intensive. Second, the more complex a rule or regulation, the more costly it is for small business to use it. Consequently, even the employment tax credit, which should benefit the small firm is not used by them. Instead, it tends more to benefit the larger firm. Neutrality, as a governmental policy, would appear to demand different treatment for firms of varying size. As an example, the “regulatory flexibility” concept applies different standards to different sized firms so that the burden of regulation is more equitably distributed. The concept of encouraging or requiring financial institutions and other lenders to establish “dual prime rates” is a further example. Since small firms appear to have much higher debt to equity ratios and rely more heavily on shorter-term bank credit, they are more heavily burdened by a tight money policy which forces increases of interest rates. Thus, dual prime rates help to spread the burden of rising interest costs more equally. As many people prefer to work for themselves, equalizing the burden of government policy could only serve to increase the basic growth rate for small business, thus providing an easier start for entrepreneurs and would encourage a more rapid rate of economic growth. None of these discussions, however, argues that small business should be protected from failure. The more efficient firms will succeed and prosper, and the least efficient will not. Many currently successful entrepreneurs learn how to improve their production processes or managerial skills from their failures. What is being recommended as a first step is that government should concentrate on equalizing burdens and benefits in order to achieve true neutrality. If private economies of scale do indeed exist, new firms must grow to survive; what the government should not create are artificial economies of scale with public policy. A strong argument for further action can also be made: it appears that significant external benefits are produced by an economic system with a dynamic small business sector. Since these benefits go to society as a whole rather than entrepreneurs alone in the form of increased profits, a freely operating market without government assistance does not generate as many new small businesses as would be optimal for our society. To internalize the benefits that come from small business, governmental programs need to be devised to increase the rate of return on new, innovative small businesses. Should this happen, we could then anticipate increased rapid rates of innovation and technological change, more rapid rates of employment growth, expanded price competition in all sectors of the economy, and improved export capabilities, in short, true flexibility in our capitalistic system.     

MONOPSONY AND PLANT LOCATION IN A THÜNEN LAND USE MODEL*

ABSTRACT. Previous work has developed a method for studying noninfinitesimal operational units, called “plantations,” with the Thüen model. In that model, increasing returns to scale generate large operational units, but the potential market power conferred by the scale economies is sidestepped as an issue. The present work introduces finite supply elasticities and examines their locational impacts. The profit-maximizing monopsonistic plantation is smaller, and the shipment distance for its processed output is shorter, than for a comparable competitive plantation. The present approach does not involve spatial competition strategies.     

BASING-POINT PRICING AND INCOMPLETE COLLUSION*

ABSTRACT. It has been contended that basing-point pricing (BPP) is not indicative of anticompetitive behavior because a cartel would never attain maximum profits by using BPP. We disprove this contention. BPP is the profit-maximizing pricing strategy for a cartel that faces competition only at selected locations. In addition, our model explains the emergence of multiple basing points, and establishes that BPP must be consistent with a market-division scheme.     

ON THE OPTIMUM LOCATION OF VERTICALLY RELATED FIRMS WITH SIMULTANEOUS ENTRY*

ABSTRACT This paper considers a case of bilateral monopoly and examines the possibility of an intermediate location for two vertically related firms under simultaneous entry, and then analyzes the welfare-maximizing location for both firms. It shows that whatever the case, an intermediate location for both firms is unlikely to occur and that the pattern of industrial location under welfare maximization is equivalent to the one under perfect competition, but is different from the one under bilateral monopoly under certain circumstances.     

Innovation and Small Firms’ Growth Prospects: Relational Proximity and Knowledge Dynamics in a Low-tech Industry

The paper tests the hypothesis that innovation activity determines the growth prospects of small low-tech firms. Innovation here is analysed as a function of a firm's knowledge base and the relational proximity processes it is involved in. Analysis refers to small and medium- sized enterprises in tourism under the premise that important insights might be provided as regards to the functioning of innovation processes in low-tech industries.     

Agglomeration,foreign firms and firm exit in regions under transition: the increasing importance of related variety in Hungary

ABSTRACT

Related variety of economic activities is widely recognized to induce regional development; however, it is not clear how this mechanism takes place in regions that go through major structural and institutional transformation. Furthermore, foreign direct investment (FDI) is typically a major source of structural change in these areas; and we still need a better understanding on how foreign-owned (foreign) firms affect the dynamics of domestic-owned (domestic) companies. For these reasons we analyse firm-level exit in Hungarian city regions between 1996 and 2011, over the late post-socialist transition in manufacturing industries, focusing on the difference between foreign and domestic firms. Introducing ownership into the related variety calculation, we estimate the probability of firm exit with the region-level related variety calculated separately for foreign and domestic firms. Our results suggest that related variety of foreign firms decreases the probability of domestic firm exit earlier during the economic transition compared to the related variety of domestic firms. This finding supports the idea that FDI plays a formative role in regions under transition, and shows that domestic firms benefit from being in agglomerations where foreign firms are technologically related to each other.     

Recent Technology Imports into India: Results of a Survey

This paper analyses the results of a survey of twenty-four recent cases of technology imports into India. Over the last thirty years, large firms in Indian industry have come under increasing competitive pressure from small firms which pay lower wages and which are also favoured by government policy. Most small firms obtain technology through informal channels within the country. But some import technology; and larger firms import it in their defence against competition from small firms. Larger firms, with a history and a reputation, have better access to technology from abroad; smaller firms often go through an extensive search before they find a willing technology supplier. Irrespective of size, firms that import technology within their own specialization are observed to put more effort into technology choice, absorption and adaptation. Indian policies of across-the-board import substitution, by promoting diversification into new products developed abroad, tend to discourage specialization and hence to encourage technology imports and to work against technology absorption and innovation.     

Spatial Price Discrimination in Two-Dimensional Competitive Markets

Intuition suggests that firms that can apply price discrimination make higher profits than firms that are restricted in their pricing policy. In this paper, we show that, in general, this is not the case. In the framework of a two-dimensional spatial model with elastic demand à la Lösch, we further investigate the interplay of transport costs, competition, and price policy. One of our results is that under realistic specifications of parameters each firm gains a monopolistic area in the center of its market that has the same shape as the entire market, but with a convexly or concavely distorted separating line, depending on the extension of the market.     

Consumer and Producer Behavior in a Multipurpose Shopping Environment

This paper analyzes the shopping behavior of consumers across space within the context of multipurpose shopping. The degree of multipurpose shopping is derived, as are the optimal number of single- and multipurpose trips, and the quantities of high- and low-order goods purchased on such trips. It is shown that all consumer choice variables are a function of consumer location relative to producer location. The consumer analysis is then utilized as an input into the profit-maximizing equation that determines optimal producer location. The model is illustrated through the use of numerical analysis.