The effect of Stackelberg cost reductions on spatial competition with heterogeneous firms

Matthew Beacham

Discussion Papers from Department of Economics, University of York

Abstract: This article extends the theory of spatial competition by allowing firms to endogenously select their operating costs within a Hotelling (1929) framework. A three-stage duopoly model is examined in which the firms compete in cost reduction, locations and finally prices. Furthermore, it is assumed that firms are identical except with respect to their cost reducing technologies and one firm has a Stackelberg leadership advantage in the cost-reduction stage. The model implies two results that are unique within the literature. First, if a firm possesses both an efficieny and investment timing advantage, it always becomes the dominant firm in the product market in all relevant respects. Second, if an ex ante inefficient firm has an investment timing advantage it can only become the ex post market leader if and only if the a priori efficiency gap is not too large. Consequently, these results suggest that a firm's ability to innovate - in terms of both efficiency and timing - play a large part in determining the composition of the final product market.

Keywords: Location model; Asymmetric firms; Stackelberg game; Endogenous cost selection (search for similar items in EconPapers)
JEL-codes: L13 R32 (search for similar items in EconPapers)
Date: 2012-05
New Economics Papers: this item is included in nep-bec, nep-com and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:yor:yorken:12/14

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