Spatial competition with free entry, Chamberlinian tangencies, and social efficiency

Abstract

Free entry in Löschian spatial competition leads to a tangency between each firm's negatively sloped average revenue and the downsloping portion of average costs-as in Chamberlin's monopolistic competition. It is generally concluded that this equilibrium involves too many inefficiently small firms. However, this conclusion is incorrect. The difference between price and firm marginal production costs in spatial equilibrium is just sufficient to cover the additional marginal cost of output resulting from availability of multiple locations. This Chamberlinian tangency does not imply inefficiency, because it does not include all the social costs and benefits resulting from spatial competition. © 1984.