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Location-then-price competition with uncertain consumer tastes

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  • Kieron Meagher
  • Klaus Zauner

Abstract

We investigate Hotelling’s duopoly game of location-then-price choices with quadratic transportation costs and uniformly distributed consumers under the assumption that firms are uncertain about consumer tastes. When the uncertainty has a uniform distribution on the closed interval $[-\frac{L}{2},\frac{L}{2}]$ , with $0 > L > \infty$ , we characterize the unique equilibrium and the socially optimal locations. Contrary to the individual-level random utility models, we find that uncertainty is a differentiation force. For small (large) sizes of the uncertainty, there is excessive (insufficient) differentiation. More uncertainty about consumer tastes can have positive or negative welfare effects, depending on the size of the uncertainty. Copyright Springer-Verlag Berlin/Heidelberg 2005

Suggested Citation

  • Kieron Meagher & Klaus Zauner, 2005. "Location-then-price competition with uncertain consumer tastes," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 25(4), pages 799-818, June.
    • Handle: RePEc:spr:joecth:v:25:y:2005:i:4:p:799-818
    DOI: 10.1007/s00199-004-0520-6
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