Competition between Cities and Their Spatial Structure

Spatial competition has dealt with a single city over which firms compete. This paper extends it to a model with multiple cities. Specifically, we construct a spatial Cournot model with circular cities where consumers can choose which city to go under the spatial distribution of firms as determined by a location-quantity game. As a result, firms can agglomerate at a point even in the circular cities in equilibrium due to their ability to enhance consumer surplus at their locating city and rob more consumers of the rival city if they agglomerate to commit to the lower price. A welfare analysis shows excess agglomeration.