Competition with horizontal and vertical differentiation: Location theory and experiments

Abstract

This study considers price and location decisions of competing duopolists through an approach that integrates the traditional inside location and outside location model. One firm locates inside the city along with consumers while the other locates outside it. Under parametric firm locations, equilibrium relative prices and market shares are always equal regardless of the nature of transportation costs. When firm location is variable, equilibrium in pure strategies is non-existent under linear transportation costs but exists under non-linear transportation costs. Price and location competition in this model do not necessarily lead to the same results as in the traditional models. The extent to which experimental evidence validates the theoretical model is examined. A total of 10 experimental sessions were conducted. The experimental results indicate that the theoretical model has some predictive power for the analysis of firm spatial competition.