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Location, Location, Quality:The Fixed Differentiation Principle

Author

Listed:
  • Alon Cohen

    (Open University of Israel)

  • Aviad Heifetz

    (Open University of Israel)

Abstract

This work revisits the classic spatial duopoly location-then-prices competition with quadratic transportation costs, in the presence of vertical differentiation. We show that contrary to the substitutability between horizontal and vertical differentiation that has appeared thus far in the literature, higher-quality asymmetry does not affect locational differentiation in equilibrium. While the better-quality seller indeed approaches the city center, the worse-quality seller is simultaneously driven further away from the city, and ultimately out of the market when quality differences become large enough. Interestingly, although vertical differentiation weakens competition, total welfare increases – even when the better-quality seller ultimately monopolizes the market.

Suggested Citation

  • Alon Cohen & Aviad Heifetz, 2024. "Location, Location, Quality:The Fixed Differentiation Principle," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 65(3), pages 705-720, November.
    • Handle: RePEc:kap:revind:v:65:y:2024:i:3:d:10.1007_s11151-024-09989-3
    DOI: 10.1007/s11151-024-09989-3
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    More about this item

    Keywords

    Hotelling; Location; Vertical differentiation;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • R32 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Other Spatial Production and Pricing Analysis

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