The effects of trade liberalization with spatial markets

It is established that with the reduction of trade barriers the number of competitors on the spatial markets involved increases. This increase has short run consequences for price competition. If the trade liberalisation is anticipated by the domestic producers they will respond by changing the locational pattern as well. A unique locational equilibrium is established from the no further entry condition of the process of sequential location of exporters' outlets in the import markets. The entry process stops if no further entrant can locate between the last entrant and any of the suppliers having entered the market before without being undercut in the price game.

Enlargement and the EU Periphery: The Impact of Changing Market Potential

We study the impact of changing relative market access in an enlarged EU on the economies of incumbent Objective 1 regions. First, we track the impact of external opening on internal spatial configurations in a three-region economic geography model. External opening gives rise to potentially offsetting economic forces, but for most parameter configurations it is found to raise the locational attractiveness of the region that is close to the external market. Then, we explore the relation between market access and economic activity empirically, using data for European regions, and we simulate the impact of EU enlargement on Objective 1 regions. Our predicted market-access induced gains in regional GDP and manufacturing employment are up to seven times larger in regions proximate to the new accession countries than in “interior” EU regions. We also find that a future Balkans enlargement could be particularly effective in reducing economic inequalities among the EU periphery, due to the positive impact on relative market access of Greek regions.New economic geography, Market potential, EU enlargement, Objective 1 regions

Two stages of uniform delivered pricing and a monopolistic network in competitive electricity markets

In this contribution we assess the impact of spatial and non-spatial pricing techniques on market outcomes in deregulated electricity supply. Our analytical framework is a combination of the theory of spatial pricing and the theory of vertically related markets. A model of the traditional regional monopolies with vertical integration serves as a point of reference. The deregulated setting is characterized by a monopolistic transmission-network (upstream) and competitive production (downstream). The monoplistic network remains vertically integrated to one of the competitive producers, and serves at the same time as an essential input-facility to all producers, including the downstream-newcomers. The treatment of transport as a distinct market stage with endogenously determinded transmission- or access-rates sets this study apart from common analysis on spatial oligopolies. Specifically, we design two microeconomic models to compare two alternative pricing-arrangements: Uniform delivered pricing downstream and spatial pricing upstream on the one hand versus uniform delivered pricing downstream as well as upstream on the other hand. These options are both being practiced in different countries after deregulation and are subject to an ongoing political debate with little reference being made to theoretical foundations. The findings are threefold: Firstly, the strategic pricing behaviour on both, the monopolistic and the competitive stage is made visible. We show that in either arrangements there is no incentive on the side of the unregulated network-monopolist for complete vertical foreclosure, i.e. to set the network prices in such a way that all competition is excluded from his traditional market area. Secondly, we find that the preferences of consumers and of both types of firms vis-a-vis the spatial or non-spatial pricing policies deviate from those intuitively assumed by a number of authors. Thirdly, and most importantly, it can be shown that the total neglect of spatial components in network-pricing is accompanied by short run-welfare losses. Thus, if the simplification of network-pricing schemes by the abolishment of location- or distance-specific components induces intensified competition and - as the popular argument goes - enhanced productivity in suit, these gains will have to be weighed against the negative welfare effects caused by the disregard of spatial aspects. Too little attention is being paid to the latter side of the named trade-off.

Symmetric and Asymmetric Equilibria in a Spatial Duopoly

We describe a spatial duopoly in a Hotelling model with quadratic transportation costs where consumers are distributed according to a symmetric density whose degree of concentration is variable. By solving the two-stage game in prices and locations as a function of the concentration index, we analyse the effects on the firms’optimal choices in a unbounded strategy space of an increasing agglomeration of consumers in the middle. Traditional horizontal differentiation-locational models assume that consumers are uniformly distributed over the characteristics space. With a few exceptions, the situations in which the consumers' preferences are concentrated on a subsection of the available varieties have been neglected. This issue was successfully addressed by Tabuchi and Thisse (1995), who explicitly solved the price-location problem for two firms in the presence of a symmetric triangular consumers’ distribution. They showed that in this case any symmetric location cannot be an equilibrium, due to a discontinuity of the reactions functions generated by the non-differentiability of the consumers’ density at its modal value; rather, their model exhibits two subgame perfect asymmetric equilibria characterised by strong product differentiation. In this paper, we assume that consumers are distributed according to a trapezoid distribution. This allows a simple parametrization of the degree of consumers' concentration, which includes the uniform and the triangular distribution as limit cases, and makes possible to solve the price-location problem as a function of the concentration index. Therefore we are able to find a more general explicit solution which covers those previously discussed in the literature. The basic results of the paper are the following. A symmetric equilibrium exists for all values of the concentration parameter, provided that the density is differentiable at the centre of its support. A higher degree of the consumers’ concentration around the middle induces firms to move inwards, in order to locate closer to the growing share of consumers: competition in the highly populated central area of the market reduces differentiation and strengthens price competition. The overall equilibrium shows clearly that the demand effect outweighs the strategic effect. However the symmetric equilibrium may be not unique. When concentration becomes sufficiently high, two asymmetric specular equilibria coexist with the symmetric one. They arise for a degree of concentration lower than that implied by a triangular distribution, with price-location choices collapsing in the limit to those identified by Tabuchi and Thisse. At these equilibria one firm locates in the central area of the market, while the other locates outside the market space. These results are consistent with the idea that a higher concentration of consumers around the centre induces firms to reduce the optimal product differentiation and offer theoretical support to the intuition that homogeneity of consumers might have important implications in terms of reducing the firms' market power. However, our findings suggest that in models of spatial competition realistic representations of the demand side may generate a ‘strange’ interplay between the strategic effect and the demand effect which may cause a failure of the uniqueness property and weakens the economic interpretation of equilibria.

A high-rise on Main Street: Hotelling with mobile consumers

This note considers Hotelling’s (1929) model of locational choices by two firms and subsequent price competition in a setting where atomistic consumers locate first. It is shown that any equilibrium in pure strategies involves either one or two mass points with all surplus captured either by the consumers or by firms, respectively.

Reachability of locational Nash equilibria

This paper examines the location of duopolists on a tree. Given parametric prices, we first delineate necessary and sufficient conditions for locational Nash equilibria on trees. Given these conditions, we then show that Nash equilibria, provided they exist, can be reached in a repeated sequential relocation process in which both facil-ities follow short-term profit maximization objectives

Merger, partial collusion and relocation

We set up a three-firm model of spatial competition to analyse how a merger affects the incentives for relocation, and conversely, how the possibility of relocation affects the profitability of the merger, particularly for the non-participating firm. The analysis is carried out for the assumptions of both mill pricing and price discrimination, and we also consider the case of partial collusion. For the case of mill pricing, a merger will generally induce the merger participants to relocate, but the direction of relocation is ambiguous, and dependent on the degree of convexity in the consumers' transportation cost function. We also identify a set of parameter values for which the free-rider effect of a merger vanishes, implying that the possibility of relocation could solve the `merger paradox', even in the absence of price discrimination.spatial competition, merger, relocation, partial collusion

Merger, partial collusion and relocation

We set up a three-firm model of spatial competition to analyse how a merger affects the incentives for relocation, and conversely, how the possibility of relocation affects the profitability of the merger, particularly for the non-participating firm. The analysis is carried out for the assumptions of both mill pricing and price discrimination, and we also consider the case of partial collusion. For the case of mill pricing, a merger will generally induce the merger participants to relocate, but the direction of relocation is ambiguous, and dependent on the degree of convexity in the consumers’ transportation cost function. We also identify a set of parameter values for which the free-rider effect of a merger vanishes, implying that the possibility of relocation could solve the ‘merger paradox’, even in the absence of price discrimination.Spatial competition; Merger; Relocation; Partial collusion.

Towards a Differentiated Analysis of Competition of Competition Laws

Can "competition of competition laws" be a feasible concept that should play an important role in an international order for the worldwide protection of competition? We introduce four different types of regulatory competition that allow for a more differentiated analysis of beneficial and deficient effects of competition of competition laws. Our analysis shows that most types of regulatory competition have a rather limited scope for application to competition laws. However, yardstick competition can be very promising and represents a powerful argument against centralisation. An important result of our analysis is that the institutional framework of any competition of competition laws plays a crucial role for its workability.