Price Competition among Oligopolistic Firms in a Spatial Economy Preliminary Version

This paper presents a spatial economy in the spirit of the so called “new economic geography ” literature in which strategic interactions among firms are operative. It is shown that the forces driving regional concentration of economic activity crucially depend on firms ’ pricing decisions. Strategic interactions affect the critical levels of trade costs at which the symmetric equilibrium is broken, core-periphery patterns become sustainable and trade occurs. In particular, when firms located in the same region collude a bell-shaped curve of spatial development may be observed. For decreasing transport costs from high to intermediate agglomeration and divergence of industrial activity take place. Further reductions encourage firms to locate in different regions and a symmetric configuration eventually arises. On the other hand, when firms do not collude a core-periphery pattern always emerges for low transportation costs as in the standard core-periphery model with monopolistic competition