The Location Model with Reservation Prices

H.M. Webers

Research output: Book/ReportReport

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Abstract

In this paper, we analyze a variant of the standard Hotelling model of spatial competition where firms first choose locations along the line and then, given these locations, compete in prices.Consumers have a finite reservation price and incur a quadratic transportation cost.We show that there exists a unique subgame perfect Nash equilibrium with identical prices for the location-then-price game if the reservation price is sufficiently high.In that case the degree of differentiation is nondecreasing in the reservation price, for differentiation relaxes price competition.If the reservation price is lower, there is a continuum of subgame perfect Nash equilibria due to the fact that firms may act as local monopolists and the other firm's location choice becomes of less importance.All equilibria yield the same profit, however.
Original languageEnglish
Place of PublicationTilburg
PublisherMicroeconomics
Number of pages21
Volume718
Publication statusPublished - 1996

Publication series

NameFEW Research Memorandum
Volume718

Keywords

  • pricing
  • location theory
  • game theory
  • equilibrium theory
  • location models

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