Webers, H.M. (Tilburg University, Faculty of Economics and Business Administration)
Abstract
In this paper, we analyze a variant of the standard Hotelling model of spatial competition where firms first choose locations along the line and then, given these locations, compete in prices. Consumers have a finite reservation price and incur a quadratic transportation cost. We show that there exists a unique subgame perfect Nash equilibrium with identical prices for the location-then-price game if the reservation price is sufficiently high. In that case the degree of differentiation is nondecreasing in the reservation price, for differentiation relaxes price competition. If the reservation price is lower, there is a continuum of subgame perfect Nash equilibria due to the fact that firms may act as local monopolists and the other firm's location choice becomes of less importance. All equilibria yield the same profit, however.
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Publisher Info
Paper provided by Tilburg University, Faculty of Economics and Business Administration in its series Research Memorandum with number
718.
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