How market interactions shape the city structure
We develop a spatial monopolistic competition model in which city structure formation is
entirely driven by market interactions. When preferences and transport costs are described by
real analytic functions, equilibrium land-use patterns are segregated. We completely solve the
case of quasilinear quadratic preferences and quadratic transport costs. The city is monocentric
when firms are few, duocentric when they are neither too few nor too many, and involves a
residential central area bordered by two commercial clusters when firms are many. In the
long-run equilibrium, the city size and its spatial structure may change swiftly in response to
tiny variations in the opportunity cost of land. Our model captures spatial price dispersion
without involving any search frictions.
Standard measures of competitive toughness fail to capture the fact that, as consumers optimize intertemporally, firms operating today compete with (yet non-existent) businesses which will be started tomorrow. We develop a two-tier CES model of dynamic monopolistic competition in which the impact of product differentiation on the market outcome depends crucially on the elasticity of intertemporal substitution (EIS). The degree of product differentiation per se fails to serve as a meaningful indicator of competitive toughness: what matters is its cross-effect with EIS. We also extend the model to the case of non-CES preferences to capture variable markups.
We propose a model of monopolistic competition with additive preferences and variable marginal costs. Using the concept of "relative love for variety," we provide a full characterization of the free-entry equilibrium. When the relative love for variety increases with individual consumption, the market generates pro-competitive effects. When it decreases, the market mimics anti-competitive behavior. The constant elasticity of substitution is the only case in which all competitive effects are washed out. We also show that our results hold true when the economy involves several sectors, firms are heterogeneous, and preferences are given by the quadratic utility and the translog.
Some Internet stores manage to charge prices that are significantly higher than market averages, therefore, obtaining some sort of price premium. This paper is dedicated to building a model that can be used to explain and predict a typical price premium that an Internet store charges for a specific product based on the information about the characteristics of the store and the features of the market for this product. Such models can provide support for pricing and assortment decisions: in particular, they allow detecting products that a store is likely to sell with the highest or the lowest markup based on price premia that are charged by stores with similar characteristics on similar markets.