Restrictions in Spatial Competition

Buechel, Berno; Klein, Jan F.

doi:10.1007/s41412-016-0003-6

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Restrictions in Spatial Competition : The Effects on Firms and Consumers

Buechel, Berno University of St. Gallen & Liechtenstein-Institute
Klein, Jan F. Aalto University

2016

Published in:

Homo economicus. - 2016, vol. 33, no. 1-2, p. 157-172

English Despite the rich stream of research that evolved from Hotelling’s spatial competition model, the fact that firms’ strategies are constrained by their technological capabilities, the legal environment, or overriding corporate strategies is commonly neglected. We study a model of Hotelling–Downs competition in which two firms choose a position along a one-dimensional market given that their feasible positions are restricted to an interval. Strategy restrictions turn out to substantially affect firms’ behavior and consumers’ surplus. In contrast to existing results on spatial competition, we find that in equilibrium firms may minimally differentiate away from the center of the market or even locate completely independently of consumers’ preferences. Assessing social welfare by total transportation costs, we observe that restrictions may both enhance and reduce welfare, depending on whether the feasible positions overlap. This document contains some supplemental material. We introduce and discuss a particular model to substantiate the assertion made in the note that the novel cases can also emerge when restrictions are endogenously, not exogenously, determined. In the note we refer to this material in Section 4 in footnote 11.

Faculty

Faculté des sciences économiques et sociales et du management

Department

Département d'économie politique

Language