Demand creation and location: a variable consumer-distribution approach in spatial competition

This paper deals with a variable spatial distribution of consumers according to the location decisions of firms in spatial competition. Specifically, we present a location-then-quantity game in which some of the consumers are attracted to the firms’ locations. We show that all firms agglomerate in a circular city when the transport cost is low. This is in sharp contrast to the results shown in previous studies with fixed distributions of consumers, where such a full agglomeration never occurs in equilibrium. Welfare analysis shows excess dispersion compared with the second-best scenario.