Where to Locate in a Circular City with a Foreign Market?

This study considers a spatial Cournot competition between duopoly firms in a circular market with an exporting point connected to a foreign market. It is shown that the relative size of the foreign market is crucial in determining the location equilibrium. Specifically, when the foreign market is small, there exists a separated location equilibrium. As the foreign market size increases, the separated equilibrium locations move closer to the exporting point. When the foreign market size is relatively large, both firms agglomerate at the exporting point. Our results are robust in the case of mixed duopoly. Moreover, the equilibrium locations are either farther apart or closer to each other than the socially optimal locations for the domestic country. In addition, we explore several extensions such as two circular markets, export subsidies, and the competition between a domestic firm and a foreign firm. Finally, implications for investment promotion are also provided.