Markups and Entry in a Circular Hotelling Model | Hoover Institution

Wednesday, January 8, 2025 Hoover Institution, Stanford University Robert Barro, Hoover senior fellow (adjunct) and the Paul M. Warburg Professor of Economics at Harvard University, discussed “Markups and Entry in a Circular Hotelling Model.” PARTICIPANTS Robert Barro, John Taylor, John Cochrane, Mohamad Adhami, Annelise Anderson, Anand Bharadwaj, Jonathan Berk, Michael Bordo, Michael Boskin, Jeremy Bulow, Steve Davis, Peter DeMarzo, Sebastian Di Tella, Sami Diaf, William English, Christopher Erceg, Nello Esposito, Bob Hall, Eric Hanushek, Bob Hall, Jon Hartley, Robert Hodrick, Ken Judd, Matthew Kahn, Robert King, Morris Kleiner, Pete Klenow, Evan Koenig, Emmanuella Kyei Manu, Jeff Lacker, David Laidler, Mickey Levy, Dennis Lockhart, Xu Lu, Roger Mertz, Alexander Mihailov, Ilian Mihov, Kurt Mitman, Emi Nakamura, David Papell, Elena Pastorino, Alessandra Peter, Paul Peterson, Charles Plosser, Valerie Ramey, Kunal Sangani, Paola Sapienza, Paul Schmelzing, Guillaume Schwegler, Jon Steinsson, Richard Sousa, George Tavlas, Harald Uhlig, Marc Weidenmeier, Alexanter Zentefis ISSUES DISCUSSED Robert Barro, Hoover senior fellow (adjunct) and the Paul M. Warburg Professor of Economics at Harvard University, discussed “Markups and Entry in a Circular Hotelling Model.” John Taylor, the Mary and Robert Raymond Professor of Economics at Stanford University and the George P. Shultz Senior Fellow in Economics at the Hoover Institution, was the moderator. PAPER SUMMARY The Hotelling locational model and its adaptation to a circular city provide a core framework for industrial organization. The present paper expands the explanatory power of this model by incorporating a continuum of consumers with constant-elasticity demand functions along with stores that have constant marginal costs of production. The stores are evenly spaced in equilibrium. The model generates an approximate formula in which the markup of price over marginal cost depends on the spacing between stores and a transportation-cost parameter but is independent of the elasticity of demand. This result reflects pricing decisions by stores that factor in the threat of losing business entirely at the borders with neighboring stores. This model provides a theory of price markups that is an alternative to the familiar Lerner approach, which puts all the weight on the elasticity of demand. To read the paper, click the following link https://www.nber.org/system/files/working_papers/w32660/w32660.pdf To read the slides, click the following link https://www.hoover.org/sites/default/files/2025-01/Hotelling%20presentation.pdf

Added 13 Jun 2026