Location, Location, Quality:The Fixed Differentiation Principle

Alon Cohen and Aviad Heifetz ()
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Alon Cohen: Open University of Israel
Aviad Heifetz: Open University of Israel

Review of Industrial Organization, 2024, vol. 65, issue 3, No 4, 705-720

Abstract: 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.

Keywords: Hotelling; Location; Vertical differentiation (search for similar items in EconPapers)
JEL-codes: C72 R32 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11151-024-09989-3

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