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Vol. 31. Issue 85.
Pages 91-106 (January - April 2008)
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Vol. 31. Issue 85.
Pages 91-106 (January - April 2008)
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A Note on Product Differentiation under Concave Transportation Costs
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Carmen Arguedas
Universidad Autónoma de Madrid, Departamento de Análisis Económico: Teoría Económica e Historia Económica
Hamid Hamoudi
Universidad Rey Juan Carlos, Departamento de Fundamentos del Análisis Económico
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Abstract

Concavity of transportation costs has been rarely considered in the linear model of product differentiation, although it seems a reasonable assumption in many contexts. In this paper, we extend the results by Gabszewicz and Thisse (1986) about the existence of the sequential first-location-then-price equilibrium to the case where transportation costs are concave in distance. Thus, there exists a unique sequential equilibrium in the model of vertical differentiation which involves maximal differentiation, while the sequential equilibrium under horizontal differentiation fails to exist. In this latter case, under given locations, firms need not be sufficiently far from each other for a price equilibrium to exist. In fact, a possible equilibrium involves both firms being located near one extreme of the city. In that case, the demand of the furthest firm is non-connected.

Keywords:
Hotelling
product differentiation
concave transportation costs
non-connected demand
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The authors wish to thank an anonymous referee for his/her comments. Financial support from the Spanish Ministry of Education under research project number 5EJ2005-05206/ECON is gratefully acknowledged.

Copyright © 2008. Asociación Cuadernos de Economía
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