Why Should a Firm Choose to Limit the Size of its Market Area?

Abstract

We study when a monopolistically-competitive firm may optimally choose to limit the size of its market. This may be the case when the cost of serving the market with geographically dispersed customers is increasing in size. We also investigate the incentives faced by a firm to limit the reach of its market, when it adopts different pricing schemes. We show that under certain assumptions the derived equilibria are constrained socially optimal.Monopolistic competition; Transport costs; Endogenous fixed costs; Overlapping market areas