Geography Reference
In-Depth Information
Distance
x
d
c
d
c
Figure 3.20
Competitive region Salop model
of Figure 3.20. However, given that the existing firms will also wish to
maximize their market areas while new firms enter into the market niches,
then the existing firms have two choices. Firstly, they can also employ
price competition, but of course this will encourage the Bertrand problem.
Alternatively, each firm can also relocate slightly so as to maximize the
distance between itself and its two adjacent competitor firms. As explained
above, if
L
51 and there are
n
firms, this implies that the distance between
each brand location is equal to 1/
n
.
3.6.1
Price Competition in the Salop Model
In the Hotelling model, firms clustered together in geographical space
which engage in price competition automatically face the Bertrand
problem. At the same time, these firms have no power to increase the price
of their own products, because unilateral price rises will mean that the
firm's market area will immediately collapse to zero. As we have seen, this
provides an incentive for strong non-price competition based on brand
and design variety, giving rise to the Hotelling paradox. In the case of the
Salop model, however, the characteristics space between each producer
allows for slightly different pricing behaviour on the part of firms.
In order to help explain this, in a Salop model we first assume that there
also exists what is known as an 'outside good'. This is another consumption
