Geography Reference
In-Depth Information
Price/Cost
x
x
O
A
B
L
a
b
z
Z
c
l
Figure 3.12
The Hotelling spatial game setting
ence between firms in the determination of output quantities and market
share is also a result of locational considerations as well as pricing deci-
sions. This is a particularly important strategy in oligopolistic industries
where firms do not compete just in terms of price, but also engage to a
large degree in non-price competition, such as a product or service quality
competition. The simplest demonstration of this is the Hotelling (1921)
model, which describes the spatial interdependence between competing
firms within the context of a locational game.
In Figure 3.12 we adapt the model depicted in Figure 3.10 to the case
where both production costs and transport rates exhibited by firm
A
and
firm
B
are identical. In other words, we assume that
p
a
5
p
b
and
t
a
5
t
b
. As
before, we assume that consumers are evenly distributed along
OL
and we
also introduce the Hotelling assumption that the demand of consumers is
perfectly inelastic. As such, all consumers are assumed to consume a fixed
quantity per time period irrespective of the price of the good. However,
as consumers are also assumed to be rational, they will purchase from
whichever producer can supply to them at their location for the cheapest
delivered price.
