Market Size and Firm Location in a Service Industry

This paper investigates the welfare effects of firm location in a service industry. We consider the situation where firms determine their locations in either of two regions with a difference in market size. From the viewpoint of the consumers' welfare, there are too few firms in the large market and too many in the small market. However, from the viewpoint of the producers' and social welfare, the opposite is true. Further, an increase in the difference in market size is unambiguously unfavorable for the producers. On the other hand, such an increase is favorable for the consumers and the economy as a whole.