Externality in a Stackelberg spatial competition model

Most of spatial competition models assume firm decisions exclusively. In these models, customers choose the facility minimizing price plus transport cost. However, in markets with externalities, customers decisions are taken in relation to the behaviour of the rest of the customers. In this paper, externality costs are considered and customers decisions are imposed in order to minimize the joint cost to obtain a Pareto optimum. This is usual in both public and private sector when costs, at least in part, are supported by the government. Firms strategy is modeled as a two-stage game; first locations are selected and then, prices are chosen acording to a Stackelberg behaviour.