Location choices under quality uncertainty

Mathematical Social Sciences (Impact Factor: 0.45). 02/2005; 50(3):268-278. DOI: 10.1016/j.mathsocsci.2005.05.002
Source: RePEc

ABSTRACT We examine a linear city duopoly where firms choose their locations to maximize expected profits, uncertain about how consumers will assess the relative quality of their products. Equilibrium locations depend on the ratio of the expected quality superiority to the strength of horizontal differentiation. When it is small, firms locate at opposite endpoints. As it becomes larger, agglomeration around the centre also emerges as an equilibrium and, eventually, agglomeration becomes the only equilibrium.

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    ABSTRACT: We set-up a linear city model with duopoly upstream and downstream. Consumers have a transportation cost when buying from a retailer, and retailers have a transportation cost when buying from a wholesaler. We characterize the equilibria in a five-stage game where location and pricing decisions (wholesale and retail) by all four firms are endogenous. The usual demand and price competition effects are modified and an additional strategic effect emerges, since the retailers' marginal costs become endogenous. Firms tend to locate farther away from the market center relative to the vertically integration case. When the wholesalers choose locations before the retailers, each wholesaler locates closer to the market center relative to the retailer locations, and relative to when the wholesalers cannot move first. Each wholesaler does this to strengthen the strategic position of its retailer by credibly pulling him towards the market center. As a result, the intensity of competition is higher and industry profit is lower when upstream locations are chosen before downstream locations. Variations of the model and welfare analysis are provided.
    C.E.P.R. Discussion Papers, CEPR Discussion Papers. 01/2010;
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    ABSTRACT: We examine a linear city model with duopoly in the upstream and down- stream level. We set up a …ve-stage game where location and pricing decisions of both upstream and downstream …rms are determined. We show that the unique equilibrium outcome is maximum dierentiation by upstream and downstream …rms. Apart from the standard "demand" and "price competition" eect when …rms change their locations, there is also a third force that aects the whole- sale prices that upstream …rms charge. The interaction of these forces give the equilibrium result. Under price discrimination by the upstream …rms, wholesale and …nal prices reduce and the equilibrium locations move towards the centre of the line. Price discrimination may be not anticompetitive, as it further reduces the social transportation cost for some parameter values.
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    ABSTRACT: It is known that if exogenous cost heterogeneities between the firms in a spatial duopoly model are large, then the model does not have a pure-strategy equilibrium in location choices. It is also known that when these heterogeneities are stochastically determined after firms choose their locations, spatial agglomeration can appear. To tackle these issues, the current paper modifies the spatial framework by allowing firms to exchange the cost-efficient production technology via royalties. It is shown that technology transfer guarantees the existence of a location equilibrium in pure strategies and that maximum differentiation appears in the market. KeywordsLocation model-Asymmetric firms-Licensing-Royalty-R&D JEL ClassificationD43-D45
    Journal of Economics 01/2010; 99(3):267-276. · 0.58 Impact Factor

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