Location choices under quality uncertainty

Mathematical Social Sciences (Impact Factor: 0.46). 02/2005; 50(3):268-278. DOI: 10.1016/j.mathsocsci.2005.05.002
Source: RePEc


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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Available from: Charalambos Christou
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    • "Therefore, asymmetric information fosters firm's agglomeration. Vettas and Christou (2005) study the Hotelling's two-staged location game allowing for vertical differentiation. Two firms know the existing quality difference between them, but do not know who has the better quality, which is a problem of lack of information. "
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    ABSTRACT: This critical review focuses on the development of spatial competition models in which the location choice by firms plays a major role. Therefore, after a brief review of the roots of spatial competition modeling, this paper intends to offer a critical analysis over its recent developments. The starting point is the recognition of the increased importance of this topic through the quantification of the research in this field by using some bibliometric tools. After that, this study proceeds by identifying the main research paths within spatial competition modeling. Specifically, the type of strategy (Bertrand vs. Cournot competition) and its implications over location equilibria are discussed. Additionally, it is presented a comparison of the effects on the location equilibria of the most typical assumptions in literature, that respect to the market (linear vs. circular), production costs, transportation costs, as well as the number of firms. Finally, the type of information (complete vs. incomplete) and its effects over the equilibria are also discussed.
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    • "Contrary to Gerlach et al. (2005) and Christou and Vettas (2005) "
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    ABSTRACT: Using a standard linear city model with two firms, we consider how licensing activities affect the locations of the firms (i.e., the degree of product differentiation) and the in-centive for R&D investment. In contrast to recent studies showing that R&D investment results in a large cost differential between firms, thereby leading to firm agglomeration, we find that licensing activities following R&D investment always lead to the maximum differentiation between firms and the mitigation of price competition. We also show that licensing activities induce the socially optimal effort level of R&D activity.
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    • "As a matter of fact, symmetric equilibria will encompass all qualitatively interesting situations. Christou and Vettas (2005) analyze how locations are chosen by duopolists under quality uncertainty, in a model very similar to ours. 8 Their results exhibit equilibria in which horizontal differentiation is either maximal or minimal. "
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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
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