The Nature of Competition in Space
The debate about whether the general competitive equilibrium model is comprehensive enough to fully reflect the working of the spatial economy has a long history. Arrow and Debreu have made an interesting attempt to integrate space within general competitive analysis.
Specifically, they assume that a commodity is defined not only by its physical characteristics but also by the place where it is made available. This implies that the same good traded at different places is treated as different economic commodities. In addition, the above approach integrates spatial interdependence across markets into general equilibrium in the same way as other forms of interdependence: location choices are contained in the specification of the production or consumption plans selected by firms and households. Hence, the Arrow-Debreu model seems to obviate the need for a space-specific theory of prices and markets. Indeed, standard general equilibrium theory has proven to be very useful for the study of commodity flows across space provided that both firms and households have exogenously given locations. However, things become more problematic once agents are free to choose their locations.