Thomas Grandner: Department of Economics, Vienna University of Economics & B.A.
Abstract: Economides (1986) has shown that within a linear city an equilibrium exists in a two-stage location-price game when the curvature of the transportation cost function is sufficiently high. One important point is that not all of these equilibria are at maximal differentiation. In this paper we include an additional stage with decentralized wage bargaining. This intensifies price competition resulting in locations that are nearer to the extremes of the city. The magnitude of this effect depends on the bargaining power of the unions.
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