This paper presents a model of strategic locational choice by duopolistic firms in an urban area where consumer locations are endogenous and where a public facility is exogenously fixed. A welfare analysis taking their strategic behavior into account is conducted. It is shown that the firms' equilibrium locations often differ from the optimal locations which, in contrast to standard location theory, are not at the quartiles of the urban area. Corrective transportation taxes or subsidies can be used to support an optimal locational structure. Changes in transportation costs require unit-for-unit offsetting changes in transportation taxes or subsidies.

David E. Wildasin / dew@davidwildasin.us