Working Paper: CEPR ID: DP4323
Authors: Charalambos Christou; Nikolaos Vettas
Abstract: We examine a linear city duopoly where firms choose their locations to maximize expected profits, uncertain about how consumers will assess the relative quality of their products. Equilibrium locations depend on the ratio of the expected quality superiority to the strength of horizontal differentiation. When it is small, firms locate at opposite endpoints. As it becomes larger, agglomeration around the centre also emerges as an equilibrium and, eventually, agglomeration becomes the only equilibrium.
Keywords: linear city; location; product differentiation; quality uncertainty
JEL Codes: L13; L15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| quality uncertainty (L15) | firms' location choices (R30) |
| low quality uncertainty (D89) | firms' locations resemble models of pure horizontal differentiation (R30) |
| high quality uncertainty (L15) | agglomeration becomes a viable equilibrium (R32) |
| higher quality uncertainty (L15) | firms tend to agglomerate (R32) |
| expected profit from agglomeration (R32) | increases with the level of uncertainty (D80) |
| ratio of expected quality differentiation to horizontal differentiation (L15) | drives agglomeration effects (R11) |