The general consensus nowadays is that businesses do

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Unformatted text preview: ng at the company because of certain pollutants in the air. Here then is an issue of asymmetric information—the employer has some information about the job that he or she isn’t passing along to you. Suppose also you wouldn’t take this job if you had this information, but without it, you do. The general consensus nowadays is that businesses do have the ethi- Competition for customers often drives similar firms toward each other. The process by which this happens is described on this page and the next. EXH I BIT 7-4 cal responsibility to tell their customers and employees everything relevant to either buying a product or taking a job, respectively. Where Will Firms Locate? Economists often want to know what factors firms consider when deciding where to locate. For example, suppose you wanted to go into the farming business—where would you locate? Obviously you might want to locate where farmland is plentiful and the climate is conducive to growing what you want to grow (wheat, corn, etc.). Or suppose you wanted to open up a car dealership. Where would you locate? At First, Far Apart To better understand how firms make location decisions, let’s look at a hypothetical situation, as shown in Exhibit 7-4(a). In the exhibit, the letters A through Z represent customers and their locations (say, along a road). You will notice that customers A–Z are evenly distributed along this road. The numbers 1 and 2 represent competing firms, which sell the same goods. They are currently located at extreme ends of the road. If a customer wants to buy a good that either firm 1 or 2 sells, the customer will go to the firm located The Location of Firms The Location of Firms 1 2 ( a) A B C D E F G H I J K L M N O P Q R S T U V W X Y 1 Z 2 (b) A B C D E F G H I J K L M N O P 1 Q R S T U V W X Y Z 2 (c) A B C D E F G H I J K L M N 1 2 M N O P Q R S T U V W X Y Z O P Q R S T U V W X Y Z (d) A B C D E F 170 Chapter 7 Business Operations G H I J K L 07 (154-185) EMC Chap 07 5/8/06 4:53 PM Page 171 closer to him or her. This means that customers A–M will buy from firm 1 and customers N–Z will buy from firm 2. If you count the number of customers that each firm sells to, you will find the number is 13. One Firm Moves, Then the Other Now suppose that one day firm 1 moves to a different location, as shown in part (b). Ask yourself how this move serves firm 1’s best interest. The answer is that firm 1 takes away customers from firm 2. Now customers A–O are closer to firm 1 than firm 2, so these customers buy from firm 1. Customers Q–Z buy from firm 2 (P isn’t counted; he’s the same distance from 1 and 2.). In short, firm 1’s move put the firm closer to 15 customers instead of 13 customers, leaving 10 customers for firm 2. Do you think firm 2 will try to counter firm 1’s move? It is likely; after all, the firms are competing for customers. Firm 2 moves to a new location, as shown in part (c). Now customers L–Z go to firm 2, leaving customers A–K to go to firm 1....
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This document was uploaded on 01/16/2014.

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