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 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: We analyze a two-sender quality-signaling game in a duopoly model where goods are horizontally and vertically differentiated. While locations are chosen under quality undertainty, firms choose prices and advertising expenditures being privately informed about their thpes. We show that pure price separation is impossible, and that dissipative advertising is necessary to ensure existence of separating equilibria. Equilibrium refinements discard all pooling equilibria and select a unique separating equilibrium. When vertical differentiation is not too high, horizontal differentiation is at a maximum, the high-quality firm advertises, and both firms adopt prices that are distorted upwards (compared to the symmetric-informati on benchmark). When vertical differentiation is high, firms choose identical locations and espost, only the high-quality firm obtains positive profits and signals its type through advertising only. Incomplete information and the subsequant signaling activity are chowh to increase the set of parameters values for which maximum horizontal differentiation occurs. ...French Abstract : Les auteurs �tudient dans cet article, un mod�le de concurrence au sein d'un duopole dans un contexte de diff�renciation horizontale. Les produits vendus par les firmes peuvent aussi potentiellement diff�rer selon leur qualit�. Les firmes choisissent tout d'abord leurs localisations de mani�re s�quentielle puis simultan�ment leurs prix. A l'�tape de localisation, la qualit� du suiveur est connaissance commune tandis que la qualit� du leader est incertaine mais r�v�l�e de mani�re priv�e avant l'�tape de comp�tition par les prix. Ils montrent que la perspective de devoir signaler une qualit� haute par le prix induit le leader � accro�tre au maximum la diff�renciation horizontale du produit. Ce r�sultat contraste fortement avec l'�quilibre en information compl�te, qui peut impliquer une diff�renciation minimale ou interm�diaire selon les param�tres
    French Institute for Agronomy Research (INRA), Economics Laboratory in Toulouse (ESR Toulouse), Economics Working Paper Archive (Toulouse). 01/2006;
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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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