Abstract
This paper discusses the connection between a monopolistic wholesale market and a competitive retail market from a spatial perspective. The resulting model considers two sets of transport costs: (i) those between the wholesaler (or producer) and the retail firms and (ii) those between the retailers and the consumers. Irrespective of the density and spatial distribution of the retailers, the wholesaler's profit is twice as large as the aggregate profit made by all retailers. The profit of the producer increases with an increasing number of retailers, whereas the profit of a single retailer decreases. It is concluded that a zero-profit equilibrium in the retailers' market leads to maximum welfare in the entire vertically-related market.
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