Redistribution Through Local Competition
We have developed a model with two kinds of shops (local and out-of-town) and two kinds of consumer (mobile and immobile). We assume that local shops operate in monopolistic competition, while the market structure for out-of-town shops is a stable oligopoly among large retail chains. We show that policies which raise the net cost (price plus consumer travel costs) of shopping out of town may cause a discontinuous drop in the price level in local shops. The price drop is accompanied by both the entry of new local shops and a reduction of excess capacity in local shops. We draw the following conclusions from the model. To the extent that local shops serve a poorer clientele, a rise in prices at out-of-town shops will have a progressive distributive effect if it results in the local price reduction predicted here. Moreover, the same measures have the potential to improve allocative efficiency through a combination of reductions in local excess capacity and the internalization of social and environmental costs of automobile use.
KeywordsTravel Cost Demand Curve Excess Capacity Local Competition Positive Shock
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