Price variation in spatial markets: the case of perfectly inelastic demand

Abstract

This paper analyzes short-run price variation in one-dimensional (i.e., circular, linear) spatial markets where both producers and consumers are numerous. Price reaction functions are established for firms under symmetrical price conjectures. For perfectly inelastic consumer demand each firm's equilibrium price is shown to depend upon distance-decay effects in both firms' locations and marginal costs. The rate of distance decay in these effects is inversely related to the degree of price conjectural variation in the market. Boundary effects in spatial markets are also shown to influence these distance-decay rates and, thus, patterns of firms' equilibrium prices.