DP4323 Location Choices under Quality Uncertainty

Author(s): Charalambos Christou, Nikolaos Vettas
Publication Date: March 2004
Keyword(s): linear city, location, product differentiation, quality uncertainty
JEL(s): L13, L15
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4323

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.