Entry deterrence, cost advantage and horizontal product differentiation

Abstract

This paper examines the effect of heterogeneous production technologies on horizontal product differentiation or location, within the context of a duopoly model in which: the location space is a bounded line, disutility costs vary quadratically with distance, and firms play a three-stage entry-location-price game. If marginal cost differences are sufficiently small, a price and location equilibrium exists in which both firms enter and maximum differentiation occurs. If marginal cost differences are sufficiently large, a location equilibrium does not exist.