Spatial Competition and Firms’ Location Decisions under Cost Uncertainty
This paper considers a two-staged Location-Price game à la Hotelling, where firms first choose their location in the linear city and then set the prices for their goods. A lack of information arises, because before choosing their location firms are not sure about the marginal cost of their good. However, they know the two possible outcomes and their probability of occurrence in advance. We conclude that contrary to the perfect information case, firms may agglomerate at any point in the city, given that the difference between the marginal cost outcomes is sufficiently high for either firm. Also, we conclude that prices are, on average, lower in perfect information. Regarding profits we conclude that in most cases both firms are better off with imperfect information than with perfect information, which contributes to explaining firms’ incentives to develop cost reduction activities, such as R&D.
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