The Firm at Home and Abroad

Abstract

A monopolist sells a product at home and remote places. There is a cost to ship the product to the remote place or, alternatively, to build a second factory there. In Model 2A, a monopolist with one factory sells its product only at the home place. In Model 2B (localization), the firm also supplies the remote place from the same factory. In Model 2C (no localization), the firm builds a second factory at the remote place and serves customers at each place from their own factory. Model 2D considers a monopolist choosing whether to build one factory or two. Where the number of customers is sufficiently large—which in turn may require that the two places be sufficiently close together—there will be at least one factory and it will be located at the place with the larger demand. If the unit shipping cost is sufficiently low, there will be localization (i.e., one factory serves both places), and soap will be priced differently at the two places (partial freight absorption). Model 2E shows how one might think about entry deterrence at the remote place. If unit shipping cost is sufficiently high, and the smaller place has enough customers, the firm builds a second factory there and prices will be the same at the two places. In this chapter, localization and prices (one for each place) are joint outcomes of profit-maximizing behavior.