2005 Reports

Price and variety in the spokes model

Chen, Yongmin; Riordan, Michael H.

The spokes model of nonlocalized spatial competition provides a new analytical tool for differentiated oligopoly and a representation of spatial monopolistic competition. At the unique symmetric equilibrium of the spokes model, an increase in the number of firms leads to lower prices when consumers have relatively high product valuations, but, surprisingly, to higher prices for lower consumer valuations. New entry alters consumer and social welfare through price, market expansion, and matching effects. With free entry, there can be multiple equilibria in the number of firms, the market may provide too many or too few varieties from a social welfare perspective, and the equilibrium price remains above marginal cost even when the number of firms is arbitrarily large.