Location and Spatial Pricing Theory with Nonconvex Transportation Cost Schedules

A model of consumer behavior is developed in which, owing to a nonconvexity in the transportation cost of obtaining the desired commodity bundle, consumers are attracted to marketplaces offering a larger variety of commodities. Impacts on marketeers' equilibrium locations and pricing strategies are studied within a simple model. Agglomeration economies naturally emerge and lead sellers to associate spatially and charge higher noncooperative equilibrium prices than under locational monopoly, despite possibly increased competition. In general, equilibrium prices at one marketplace depend on the structure of the commodity bundle offered there. Differences in that bundle across marketplaces lead to a nondegenerate equilibrium price distribution for the same commodity, even if the agents involved are perfectly informed and totally undifferentiated a priori. There finally emerge welfare comparisons between equilibria involving competitive one-product sellers and those involving local monopolists.