Finding the Sweet Spot in the City: a Monopolistic Competition Approach

We propose a general equilibrium model to study the spatial inequality of consumers and firms within a city. Our mechanics rely on Dixit and Stiglitz monopolistic competition framework. The firms and consumers are continuously distributed across a two-dimensional space, there are iceberg-type costs both for goods shipping and workers commuting (hence firms have variable marginal costs based on their location). Our main interest is in the equilibrium spatial distribution of wealth. We construct a model that is both tractable and general enough to stand the test of real city empirics. We provide some theoretical statements, but mostly the results of numerical simulations with the real Moscow data.