Geography Reference
In-Depth Information
Price/Cost
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Figure 3.14
The welfare implications of the Hotelling spatial equilibrium
the quartiles is not a special case. The Nash equilibrium generated by
the Hotelling spatial location game implies that under certain conditions
regarding the nature of spatial market environments, there are situations
in which firms will naturally cluster together in space, precisely as a result
of competitive behaviour.
The idea that for competitive reasons firms might naturally cluster
together in space does not necessarily imply that geographical clustering
is efficient from a social perspective. In fact, the reality may be quite the
opposite, and this is the case here. This can be demonstrated with the aid
of Figure 3.14 where we compare the delivered prices paid by consumers
in the original case at the start of the game where the firms were located
at the quartiles, and the final case where they are located together at the
centre. At both the start and the end of the Hotelling location game, the
market share of each firm is 50 per cent. We have already assumed that
all consumers at all locations have a perfectly inelastic demand curve.
Therefore the change in delivered prices faced by these consumers between
the start and the end of the Hotelling game will accurately reflect the
change in welfare of the consumers at each location.
The net effect of these welfare gains and losses can be observed in
Figure 3.14 in terms of the areas under the delivered price curves. In the
original starting point where the firms were located at the quartiles
A
' and
B
', the delivered prices were traced by the lines going through the points
