A Hotelling model with production

This paper extends the Hotelling model of spatial competition by incorporating the production technology and labor inputs. A duopolistic game is constructed in which firms choose their locations simultaneously in the first stage, and decide the prices of the product and wages of labor in the second stage. We find that the equilibrium locations depend on the production technology. Specifically, when productivity increases, the two firms change from dispersion to agglomeration and then to dispersion again. We then analyze the case with a minimum wage requirement and show the robustness of the equilibrium locations. Furthermore, the socially optimal locations do not depend on the production technology and the minimum wage requirement. However, a higher minimum wage increases unemployment and prices, which may reduce the total welfare level.