Restrictions in spatial competition: The effects on firms and consumers

Despite the rich stream of research that evolved from Hotelling's spatial competition model, the fact that firms’ strategies are constrained by their technological capabilities, the legal environment, or overriding corporate strategies is commonly neglected. We study a model of Hotelling–Downs competition in which two firms choose a position along a one-dimensional market given that their feasible positions are restricted to an interval. Strategy restrictions turn out to substantially affect firms’ behavior and consumers’ surplus. In contrast to existing results on spatial competition, we find that in equilibrium firms may minimally differentiate away from the center of the market or even locate completely independently of consumers’ preferences. Assessing social welfare by total transportation costs, we observe that restrictions may both enhance and reduce welfare, depending on whether the feasible positions overlap.