Location Choices Under Quality Uncertainty
28 Pages Posted: 27 Apr 2004
Date Written: March 2004
We examine a linear city duopoly where firms choose their locations to maximize expected profits, uncertain about how consumers will assess the relative quality of their products. Equilibrium locations depend on the ratio of the expected quality superiority to the strength of horizontal differentiation. When it is small, firms locate at opposite endpoints. As it becomes larger, agglomeration around the centre also emerges as an equilibrium and, eventually, agglomeration becomes the only equilibrium.
Keywords: Location, product differentiation, quality uncertainty, linear city
JEL Classification: L13, L15
Suggested Citation: Suggested Citation