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Location in a Vertically Differentiated Industry

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  • E. Bacchiega
  • A. Minniti

Abstract

We analyze a model of a vertically differentiated duopoly with two regions. These two locations differ for the market size or for the distribution of the willingness to pay for quality of their consumers. Firms sequentially choose to settle in one region and then simultaneously compete in prices, selling their products both on the local market and on the foreigner one. We show that the decision whether to agglomerate or not crucially depends on the extent of regions’ asymmetries, but, counter intuitively, there are parametric configurations in which the model predicts that the leader (the first firm choosing location) settles either in the poorer or in the smaller region, leaving the other one to the follower.. Welfare analysis completes the paper.

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Paper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number 546.

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Date of creation: 2005
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Handle: RePEc:bol:bodewp:546

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  1. Hamilton, Jonathan H. & Thisse, Jacques-Francois & Weskamp, Anita, 1989. "Spatial discrimination : Bertrand vs. Cournot in a model of location choice," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 19(1), pages 87-102, February.
  2. Victor Ginsburgh & André De Palma & Yorgo Papageorgiou & Jacques Thisse, 1985. "The principle of Minimum Differentiation Holds under Sufficient Heterogeneity," ULB Institutional Repository 2013/151087, ULB -- Universite Libre de Bruxelles.
  3. Andaluz, Joaquin, 2000. "On protection and vertical product differentiation," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 30(1), pages 77-97, January.
  4. Paul Krugman, 1990. "Increasing Returns and Economic Geography," NBER Working Papers 3275, National Bureau of Economic Research, Inc.
  5. d'Aspremont, Cl. & Jaskold Gabszewicz, J. & Thisse, J. -F., 1983. "Product differences and prices," Economics Letters, Elsevier, Elsevier, vol. 11(1-2), pages 19-23.
  6. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, American Economic Association, vol. 70(5), pages 950-59, December.
  7. FRIEDMAN, James W. & THISSE, Jacques-François, . "Partial collusion fosters minimum product differentiation," CORE Discussion Papers RP -1070, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. d'Aspremont, C & Gabszewicz, Jean Jaskold & Thisse, J-F, 1979. "On Hotelling's "Stability in Competition"," Econometrica, Econometric Society, Econometric Society, vol. 47(5), pages 1145-50, September.
  9. Masahisa Fujita & Paul Krugman & Anthony J. Venables, 2001. "The Spatial Economy: Cities, Regions, and International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262561476, December.
  10. Pal, Debashis, 1998. "Does Cournot competition yield spatial agglomeration?," Economics Letters, Elsevier, Elsevier, vol. 60(1), pages 49-53, July.
  11. Schmitt, Nicolas, 1995. "Product Imitation, Product Differentiation and International Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(3), pages 583-608, August.
  12. Jehiel, Philippe, 1992. "Product differentiation and price collusion," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 10(4), pages 633-641, December.
  13. Kats, Amoz, 1995. "More on Hotelling's stability in competition," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 13(1), pages 89-93, March.
  14. Anderson, Simon P & Neven, Damien J, 1991. "Cournot Competition Yields Spatial Agglomeration," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(4), pages 793-808, November.
  15. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, Elsevier, vol. 18(2), pages 301-317, August.
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