Fournier, Gaëtan, Van Der Straeten, Karine and Weibull, Jörgen W. (2020) Spatial competition with unit-demand functions. TSE Working Paper, n. 20-1072, Toulouse

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This paper studies a spatial competition game between two firms that sell a homogeneous good at some pre-determined fixed price. A population of consumers is spread out over the real line, and the two firms simultaneously choose location in this same space. When buying from one of the firms, consumers incur the fixed price plus some transportation costs, which are increasing with their distance to the firm. Under the assumption that each consumer is ready to buy one unit of the good whatever the locations of the firms, firms converge to the median location: there is minimal differentiation. In this article, we relax this assumption and assume that there is an upper limit to the distance a consumer is ready to cover to buy the good. We show that the game always has at least one Nash equilibrium in pure strategy. Under this more general assumption, the "minimal differentiation" principle no longer holds in general. At equilibrium, firms choose "minimal", "intermediate" or "full" differentiation, depending on this critical distance a consumer is ready to cover and on the shape of the distribution of consumers' locations.

Item Type: Monograph (Working Paper)
Language: English
Date: February 2020
Place of Publication: Toulouse
Uncontrolled Keywords: Spatial competition games, horizontal differentiation, willingness to pay
Divisions: TSE-R (Toulouse)
Institution: Université Toulouse 1 Capitole
Site: UT1
Date Deposited: 06 Feb 2020 09:23
Last Modified: 08 Jun 2023 07:55
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