Heterogeneous duopoly, spatially discriminatory pricing, and optimal location

Abstract

It is found in the literature that if duopolists produce differentiated products and engage in price competition in a linear city model with elastic demand, the two firms necessarily agglomerate at the market center and this is the unique locational equilibrium, irrespective of the pricing policies charged by the firms. Utilizing a more reasonable market-serving assumption, this paper finds that the firms can be either centrally agglomerated or dispersed depending on the magnitude of the transport rate and the degree of product differentiation. Moreover, if the two firms choose quantity instead of price as their decision variables, the two firms become less likely to stay apart. But if they do, the distance of their locations necessarily shrinks. This paper also examines the locational configuration in the absence of the market-serving assumption and finds that spatial dispersion could be the only location pattern.