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Location as a Signal of Quality

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  • Vettas, Nikolaos

Abstract

We examine a horizontal product differentiation duopoly model where firms are also differentiated with respect to the quality of their products. Firms first choose their locations (or product characteristics) and then compete in prices. Under full information, it is shown that, whereas the low-quality firm prefers to locate as far as possible from its competitor, the same is not true for the high-quality firm, unless the quality difference is small enough. The paper then suggests an explanation for spatial agglomeration based on incomplete information considerations. Because it is less costly for a high-quality firm than for a low-quality firm to locate close to a rival firm, choosing a location closer to a rival signals high quality.

Suggested Citation

  • Vettas, Nikolaos, 1999. "Location as a Signal of Quality," CEPR Discussion Papers 2165, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:2165
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    Citations

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    Cited by:

    1. Bonein, Aurélie & Turolla, Stéphane, 2009. "Sequential location under one-sided demand uncertainty," Research in Economics, Elsevier, vol. 63(3), pages 145-159, September.
    2. Vettas, Nikolaos & Kourandi, Frago, 2010. "Endogenous Spatial Differentiation with Vertical Contracting," CEPR Discussion Papers 7948, C.E.P.R. Discussion Papers.
    3. Jianyu Yu & Zohra Bouamra-Mechemache & Angelo Zago, 2018. "What is in a Name? Information, Heterogeneity, and Quality in a Theory of Nested Names," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 100(1), pages 286-310.
    4. Griva, Krina & Vettas, Nikolaos, 2011. "Price competition in a differentiated products duopoly under network effects," Information Economics and Policy, Elsevier, vol. 23(1), pages 85-97, March.
    5. Mario A. Maggioni, 2004. "The rise and fall of industrial clusters: Technology and the life cycle of region," Working Papers 2004/6, Institut d'Economia de Barcelona (IEB).
    6. Christou, Charalambos & Vettas, Nikolaos, 2005. "Location choices under quality uncertainty," Mathematical Social Sciences, Elsevier, vol. 50(3), pages 268-278, November.
    7. Heiko A. Gerlach & Thomas Rønde & Konrad Stahl, 2005. "Project Choice And Risk In R&D," Journal of Industrial Economics, Wiley Blackwell, vol. 53(1), pages 53-81, March.
    8. James D. Campbell, 2015. "Localized price promotions as a quality signal in a publicly observable network," Quantitative Marketing and Economics (QME), Springer, vol. 13(1), pages 27-57, March.
    9. Stahl, Konrad & Gerlach, Heiko A. & Rønde, Thomas, 2002. "Market and Technical Risk in R&D," CEPR Discussion Papers 3450, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    Horizontal and Vertical Differentiation; Location; Quality; Signaling; Spatial Agglomeration;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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