A Hotelling model of spatial competition with local production

Local production is a central theme in sustainable development and is of increasing current interest in e.g. food and energy production. This paper extends the classical Hotelling duopoly model of spatial competition to allowing for local production at the household level. The model is applied to study the existence and efficiency of a price equilibrium in the presence of local production. The optimal solution to the corresponding planning problem minimizing the sum of the resource costs is derived. Assuming the duopolists are symmetrically located on a line, the equilibrium number of local producers (ecological entrepreneurs) exceeds the optimal number. However, local production implies a lower equilibrium price than the standard Hotelling model and may extend the range of the symmetric locations of the duopolists for which a price equilibrium exists.