Competitive location, production, and market selection

Abstract

This paper investigates how firms should select their production sites, capacities and quantities under rivalry. There are assumed to be a finite number of discrete potential location sites and a finite number of discrete markets, which may or may not coincide. Firms first decide either simultaneously or sequentially whether and where to establish a production site. The fixed cost of opening a facility and the marginal cost of production both depend on where the facility is located. Firms then choose capacity and a production quantity for each market. Prices in each market are determined by the total quantity available at that location via the Cournot mechanism. This formulation thus addresses multi-market, oligopolistic spatial competition with heterogeneity in production and logistics costs. We then analyze the Nash equilibria of the entry game and provide sufficient conditions for the existence of equilibria in the simultaneous entry game. At equilibrium, firms may not produce for all markets and may have limited market areas; however, these areas may overlap, so that there are multiple suppliers in any market. In general, there may not be a first mover advantage and early entrants may earn lower profits than later entrants.