City and Suburban Competition

This paper presents an analog to Cournot duopoly in a model of the local public sector, with one city and a suburb. Reaction functions are derived for the mayor of the city and of the suburb, and properties of the Nash equilibria are analyzed. The translation of the Cournot duopoly model is not simply a matter of renaming variables, because of the role of land rents. As residents move, they impose a pecuniary externality on others through higher land prices as well as by changing incentives facing each mayor. Comparative statics results are derived for changes in agricultural land prices and transportation costs and for their effects on city population and rents captured by the city mayor