Paul KRUGMAN, professor of economics at Princeton University, is well-known for his models of increasing returns in the world trade theory and their use in economic geography. His aim is to explain the reasons for the localization of activities and the concentration of firms. The purpose of this...

This paper presents empirical evidence which at first glance appears to show that firms are not pricing to maximize profits. We then present a model to explain how this behavior is in fact optimal when we account for additional constraints faced by firms in certain product markets.