Product Variety, Price Elasticity of Demand and Fixed Cost in Spatial Models

This paper explores the implications of price-dependent demand in spatial models of product dierentiation. We introduce consumers with a quasi-linear utility function in the framework of the Salop (1979) model. We show that the so-called excess entry theorem re- lies critically on the assumption of completely inelastic demand. Our model is able to produce excessive, insucient, or optimal product variety. A proof for the existence and uniqueness of symmetric equi- librium when price elasticity of demand is increasing in price is also provided.