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Spatial Cournot Competition

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Abstract

This chapter reviews the literature on spatial Cournot competition with endogenous firms’ locations in the past 30 years, which started from Hamilton et al. (Spatial Discrimination: Bertrand vs. Cournot in a Model of Location Choice. Regional Science and Urban Economics, 19, 87–102, 1989) and Anderson and Neven (Cournot Competition Yields Spatial Agglomeration. International Economic Review, 32, 793–808, 1991). Linear markets and circular markets are two main streams in the spatial Cournot models. Overall speaking, spatial Cournot models can capture the real-world regularity (agglomeration at the market center) observed by Harold Hotelling and escape from the undercutting trap in Hotelling (Stability in Competition. Economic Journal, 39, 41–57, 1929). Moreover, diverse location patterns are shown in circular markets.

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Notes

  1. 1.

    Early spatial models such as Ricardo (1817), Von Thünen (1826), Weber (1909), and Christaller (1933) are focused on land use and simple location theory.

  2. 2.

    Modern game theory had not yet appeared in 1929. For example, John Nash was born in 1928, and thus Harold Hotelling did not yet know of the so-called Nash equilibrium, not to mention the “subgame perfect Nash equilibrium” when he published his paper in 1929.

  3. 3.

    Hotelling (1929) thought that cities are too concentrated in reality; the taste of apple ciders is too similar, and the churches of different denominations are too similar.

  4. 4.

    Hamilton et al. (1989) assumed linear demand in each point of the Hotelling (1929) market, where firms engage in Cournot (Bertrand) competition in the second stage and they simultaneously choose their locations in the first stage and the transport costs are linear in volume and distance. They showed that firms will agglomerate at the market center when they engage in Cournot competition. Anderson and Neven (1991) is different from Hamilton et al. (1989) in that Anderson and Neven (1991) discussed the scenarios with a general transport cost function and multiple firms. The central agglomeration result was obtained in both Hamilton et al. (1989) and Anderson and Neven (1991).

  5. 5.

    Earlier spatial Cournot models include Greenhut and Greenhut (1975), Greenhut and Ohta (1975), Norman (1981), Greenhut et al. (1987), and Ohta (1988), whose models assumed exogenous locations for firms.

  6. 6.

    In fact, they assumed the length of the market is L. For simplicity, we here normalize the length of the market to be one.

  7. 7.

    However, they abandoned the inelastic demand, price competition, and consumer-paid transport costs that were employed in Hotelling (1929).

  8. 8.

    The reservation price ``a'' in Anderson and Neven (1991) is replaced by ``α'' in Chamorro-Rivas (2000a). When α < t, there exist some areas where no service is provided. This scenario, to the best of my knowledge, has not been analyzed in detail.

  9. 9.

    In addition, Shimizu (2002) found that in Pal’s (1998) model, if the products are complementary (instead of substitutes), then the duopoly firms agglomerate at one point of the market. Yu and Lai (2003a) obtained results similar to that in Shimizu (2002) and extended their model to the situation in which each firm has two plants.

  10. 10.

    In fact, Gupta et al. (2004) was composed of two separate articles, Gupta et al. (2003) and Yu and Lai (2003b), because they independently solved the same problem and submitted their papers to the International Journal of Industrial Organization at the same time; after the first reviewing process, the Editor asked for the two articles to be merged.

  11. 11.

    The directional constraint can be found in earlier studies in Cancian et al. (1995) and Lai (2001), where firms only engage in location competition.

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Authors and Affiliations

  1. Research Center for Humanities and Social Sciences, Academia Sinica, Nankang, Taipei, Taiwan

    Fu-Chuan Lai

  2. Department of Public Finance, National Chengchi University, Taipei, Taiwan

    Fu-Chuan Lai

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  1. Department of Economics & Finance, Università Cattolica del Sacro Cuore, Milano, Italy

    Stefano Colombo

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Lai, FC. (2020). Spatial Cournot Competition. In: Colombo, S. (eds) Spatial Economics Volume I. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-40098-9_2

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  • DOI: https://doi.org/10.1007/978-3-030-40098-9_2

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