Vertical differentiation in a generalized model of spatial competition

Abstract

In a duopoly model of spatial competition where consumer's surplus function contains both a linear and a quadratic disutility component, it is shown that the nature of differentiation at equilibrium depends on the distribution of roles across firms and the relative weight of linear and quadratic components in the transportation cost function. Vertical differentiation is more likely to obtain the lower the weight attached to the linear component and the higher the advantage enjoyed by one firm over the rival.