Non-localised Spatial Competition: The "Spokes Model"

Abstract

The "spokes model" takes the name from its graphical visualisation, that resembles the spokes of a bike's wheel. It describes a market as a collection of spokes, joining at a common centre, where consumers are located. Firms may be situated at the extreme of these spokes, at the interior of the market structure or even outside of the spokes structure. The model has been introduced relatively recently (Chen and Riordan, Price and Variety in the Spokes Model, Economic Journal, 2007) and it is a useful tool to model product differentiation. An important characteristic is that competition between firms is spatial, i.e., the distance between consumers and firms is crucial for the outcomes, but non-localised, as a firm competes directly with all others and not only with the neighbours. This chapter: (i) introduces a benchmark version of the spokes model; (ii) clarifies important characteristics that distinguish it from other approaches existing in the literature; (iii) highlights its suitability for applications, by reviewing the flourishing literature that has been adopting this approach. Applications are presented by reviewing the role of non-localised competition on: (i) pricing decisions; (ii) location choices; (iii) variety provision.