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The effect of Stackelberg cost reductions on spatial competition with heterogeneous firms

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  • Matthew Beacham
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    Abstract

    This article extends the theory of spatial competition by allowing firms to endogenously select their operating costs within a Hotelling (1929) framework. A three-stage duopoly model is examined in which the firms compete in cost reduction, locations and finally prices. Furthermore, it is assumed that firms are identical except with respect to their cost reducing technologies and one firm has a Stackelberg leadership advantage in the cost-reduction stage. The model implies two results that are unique within the literature. First, if a firm possesses both an efficieny and investment timing advantage, it always becomes the dominant firm in the product market in all relevant respects. Second, if an ex ante inefficient firm has an investment timing advantage it can only become the ex post market leader if and only if the a priori efficiency gap is not too large. Consequently, these results suggest that a firm's ability to innovate - in terms of both efficiency and timing - play a large part in determining the composition of the final product market.

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    Bibliographic Info

    Paper provided by Department of Economics, University of York in its series Discussion Papers with number 12/14.

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    Date of creation: May 2012
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    Handle: RePEc:yor:yorken:12/14

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    Keywords: Location model; Asymmetric firms; Stackelberg game; Endogenous cost selection;

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    1. Alderighi, Marco & Piga, Claudio A., 2010. "On cost restrictions in spatial competition models with heterogeneous firms," Economics Letters, Elsevier, vol. 108(1), pages 40-42, July.
    2. Toshihiro Matsumura & Noriaki Matsushima, 2010. "Patent licensing, bargaining, and product positioning," ISER Discussion Paper 0775, Institute of Social and Economic Research, Osaka University.
    3. Toshihiro Matsumura & Noriaki Matsushima, 2009. "Cost differentials and mixed strategy equilibria in a Hotelling model," The Annals of Regional Science, Springer, vol. 43(1), pages 215-234, March.
    4. Marco Alderighi & Claudio A. Piga, 2008. "The Circular City with Heterogenous Firms," Working Paper Series 16-08, The Rimini Centre for Economic Analysis, revised Jan 2008.
    5. Mai, Chao-cheng & Peng, Shin-kun, 1999. "Cooperation vs. competition in a spatial model," Regional Science and Urban Economics, Elsevier, vol. 29(4), pages 463-472, July.
    6. d'Aspremont, C & Gabszewicz, Jean Jaskold & Thisse, J-F, 1979. "On Hotelling's "Stability in Competition"," Econometrica, Econometric Society, vol. 47(5), pages 1145-50, September.
    7. Toshihiro Matsumura & Noriaki Matsushima, 2004. "Endogenous Cost Differentials between Public and Private Enterprises: A Mixed Duopoly Approach," Economica, London School of Economics and Political Science, vol. 71(284), pages 671-688, November.
    8. Jonathan Vogel, 2008. "Spatial Competition with Heterogeneous Firms," Journal of Political Economy, University of Chicago Press, vol. 116(3), pages 423-466, 06.
    9. Ziss, Steffen, 1993. "Entry deterrence, cost advantage and horizontal product differentiation," Regional Science and Urban Economics, Elsevier, vol. 23(4), pages 523-543, September.
    10. repec:ebl:ecbull:v:12:y:2005:i:20:p:1-8 is not listed on IDEAS
    11. Toshihiro Matsumura & Noriaki Matsushima & Giorgos Stamatopoulos, 2010. "Location equilibrium with asymmetric firms: the role of licensing," Journal of Economics, Springer, vol. 99(3), pages 267-276, April.
    12. Domenico Scalera & Alberto Zazzaro, 2005. "Cost reducing investments and spatial competition," Economics Bulletin, AccessEcon, vol. 12(20), pages 1-8.
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