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Endogenous Spatial Differentiation with Vertical Contracting

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  • Vettas, Nikolaos
  • Kourandi, Frago

Abstract

We set-up a linear city model with duopoly upstream and downstream. Consumers have a transportation cost when buying from a retailer, and retailers have a transportation cost when buying from a wholesaler. We characterize the equilibria in a five-stage game where location and pricing decisions (wholesale and retail) by all four firms are endogenous. The usual demand and price competition effects are modified and an additional strategic effect emerges, since the retailers' marginal costs become endogenous. Firms tend to locate farther away from the market center relative to the vertically integration case. When the wholesalers choose locations before the retailers, each wholesaler locates closer to the market center relative to the retailer locations, and relative to when the wholesalers cannot move first. Each wholesaler does this to strengthen the strategic position of its retailer by credibly pulling him towards the market center. As a result, the intensity of competition is higher and industry profit is lower when upstream locations are chosen before downstream locations. Variations of the model and welfare analysis are provided.

Suggested Citation

  • Vettas, Nikolaos & Kourandi, Frago, 2010. "Endogenous Spatial Differentiation with Vertical Contracting," CEPR Discussion Papers 7948, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:7948
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    References listed on IDEAS

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    Cited by:

    1. Yen-Ju Lin & Yan-Shu Lin & Kuang-I Tu, 2016. "Strategic input outsourcing and equilibrium location choice," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 56(1), pages 83-99, January.
    2. Matteo Bassi & Marco Pagnozzi & Salvatore Piccolo, 2015. "Product Differentiation by Competing Vertical Hierarchies," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 24(4), pages 904-933, October.
    3. Yen-Ju Lin & Yan-Shu Lin & Kuang-I Tu, 2016. "Strategic input outsourcing and equilibrium location choice," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 56(1), pages 83-99, January.
    4. João Correia-da-Silva & Joana Pinho, 2011. "Costly horizontal differentiation," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 10(3), pages 165-188, December.
    5. Li, Shengyu & Luo, Rong, 2020. "Non-Exclusive Dealing with Retailer Differentiation and Market Penetration," International Journal of Industrial Organization, Elsevier, vol. 70(C).

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    More about this item

    Keywords

    Linear city; Locations; Spatial differentiation; Strategic commitment; Vertical contracting;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • 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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