Location and Product Differentiation in a Duopoly with Externalities
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Abstract
In a duopoly model, marginal cost decreases if product differentiation does so, provided that firms are located in the same region. In equilibrium, the larger the cost that can be saved under agglomeration, the less differentiated varieties are. A pattern of dispersion, agglomeration, and then dispersion again can emerge as transport costs go down due to the interplay between product differentiation and the cost externality.
