Product Variety: The Intensive vs. Extensive Margins of Efficiency

The paper creates and analyzes a circular location model where a social planner chooses the addresses on the circular product spaces where a firm can enter. The paper identifies two different regimes that a social planner can use in order to determine exactly how many firms enter at the different locations. At each different address, firms compete via Cournot to serve the consumer base. In symmetric equilibrium there will be the same number of firms and output produced at each location. When the social planner adds more locations, he increases product variety and competition among the locations, but also decreases the number of firms at each location, which in turn increases inefficiency.