Hotelling’s webshop

Abstract

We extend Hotelling’s model of spatial competition by adding an outside good, provided by a webshop. Unlike the commonly used reservation price, the price of the webshop is endogenous. We establish that a Nash equilibrium exists if the outside good is not too different from the goods sold by the bricks-and-mortar shops. Equilibrium prices positively depend on transport costs, which would not be the case for an exogenous reservation price. If the webshop serves an alternative market as well, the price of that market is partly imported into the local market. The bricks-and-mortar shops compete only with the the webshop. The lower the webshop’s delivery costs are relative to the transport cost parameter, the wider the feasible range for locations of the bricks-and-mortar shops.