Product differentiation, economies of scale and entry

This paper extends the standard circular city model of spatial competition to incorporate economies of scale. We demonstrate that new market entry generates a negative externality by fragmenting demand and forcing existing firms to operate at a less efficient scale. This scale-fragmentation channel widens the wedge between private and social entry incentives, leading to an amplified excess-entry result. When firms can endogenously invest to lower their unit costs, market entry remains socially excessive. • The paper extends the standard Salop model to incorporate economies of scale. • Market entry generates a new externality by fragmenting demand and inducing other firms to produce at lower scale and at higher cost. • Excess entry can be amplified.