COMPETING MARKETS

In a model of two-dimensional spatial competition the notion of compet ition between market places is analyzed. While one dimension can be in terpreted as geographical distance the other dimension is some product characteristic (Like maturity of a futures contract). Initially singl e product firms select a specific location and variety and later, at a second stage, they compete in prices. In the present framework agglom eration economies arise endogenously due to savings in transportation costs for consumers. For many parameter constellations I demonstrate t hat entrants might prefer to settle in existing markets rather than se tting up their business somewhere in between. In particular, the emerg ence of new market places is less likely as transportation costs decli ne. Despite the strong forces towards agglomeration, multiple markets will arise under free entry of firms when markets are large enough. Fu rthermore, pure strategy equilibria in location do exist when search c osts are sufficiently important even for linear transportation costs. The agglomeration economies provide organizers of market places with s ome degree of market power. Indirect competition between fiscal author ities is analyzed when jurisdictions impose transactions taxes. Equili brium tax rates depend positively on transportation costs. Hence the d eregulation wave in financial markets may be understood as an equilibr ium reaction to a significant decline in transportation costs. The mod el features strong incentives for the harmonization of regulation. (C) 1998 Elsevier Science B.V. All rights reserved.