A spatial interaction model incorporating externality costs

Most of spatial competition models assume firms' decisions exclusively. In that model customers are assigned to servers minimizing the final cost (price plus transport cost). However in markets with externalities customers' decisions are taken in relation to the rest of customers' decisions. In this paper externality costs are considered and customers' decisions are imposed in order to minimize the joint cost. In this case a Pareto optimum is obtained. Firms' behaviour is modeled as a two stage game, first selecting locations and then prices.