K.U.Leuven, Faculty of Economics and Applied Economics : Department of Economics
CES - Discussion Paper Series (DPS) 06.07 pages:1-26
In this paper we study how trip chaining affects the pricing and equilibrium number of firms. We use a monopolistic competition model where firms offer differentiated products as well as differentiated jobs to households who are all located at some distance from the firms. Trip chaining means that shopping and commuting can be combined in one trip. The symmetric equilibriums with and without the option of trip chaining are compared. We show analytically that introducing the trip chaining option can, in the short run, only decrease the profit margin of the firms and will increase welfare. The welfare gains are however smaller than the transport cost savings. In the long run, with free entry, the number of firms decreases but welfare with trip chaining possible is still higher than when it is excluded. A numerical illustration gives orders of magnitude of the different effects.