Imperfect competition and congestion in the City

Imperfect competition and congestion in the
City

André de Palma and Stef Proost*

July, 2003, Revised May,2004 ^t

Abstract

This paper presents a spatial model to study imperfect competition
with congestion. The model is used to examine the price and wage set-
ting of subcenters of a city. Residents live in a city while they shop and
work in subcentres. Each subcenter offers one differentiated product and
one differentiated workplace. Shopping and commuting from the city to
the subcenter requires the use of transport infrastructure that can be con-
gested. We show the existence of a Nash equilibrium in prices and wages
and analyse the welfare impacts of congestion charging and infrastructure
policies. This paper generalises the literature on imperfect competition
with differentiated products as well as the literature on congestion pricing
with imperfect competition.

Keywords: Road Pricing, Product Differentiation, Location Theory,
New Economic Geography, Congestion.

JEL: L13, D43, R41, R3

‘André de Palma: Member of the Institut Universitaire de France, THEMA, Uni-
versité de Cergy-Pontoise, France and C ORE, Belgium. Stef Proost, Center for Eco-
nomic Studies, Catholic University of Leuven and CORE, Belgium. Correspondence to
[email protected] //CES-KULeuven, Naamse straat 69, 3000 Leuven, B elgium,
Tel +32 16 326801 Fax +32 16 326796

^We would like to thank Fay Dunkerly and Jacques Thisse for their suggestions on an early
version of this paper.

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