Location choice and costly product differentiation in a mixed duopoly

Abstract

This paper introduces costly product differentiation into a mixed duopoly with strategic location choice in the first stage and price competition in the second stage. Initially, both firms locate at the center with no product differentiation. We demonstrate that the location choices critically depend on the effectiveness of investments in creating product differentiation, and the nationality of the private firm. Firstly, firms choose to move toward the edge only when the investments are sufficiently effective, regardless of whether the private firm is domestic or foreign. Secondly, a profit-maximizing (domestic or foreign) private firm invests more than the public firm which maximizes social welfare. Thirdly, a mixed duopoly with a foreign firm generates a lower degree of product differentiation in comparison to that with a domestic private firm.