Quality-price choices and market configurations when location matters

Abstract

This paper investigates how preexistent asymmetries in the way consumers value each firm’s product influence quality-price decisions when consumers differ in quality valuation but incur a transportation cost when buying from the firm located on the periphery. We show that for a given location, the high-quality firm charges a higher price and that for given qualities, the firm located in the center charges higher prices. Regarding quality choices, we show that the firm located in the center may be able to behave as a partial coverage monopolist. Under duopoly, quality differentiation always exists, and in general, the high-quality firm may be located either in the center or on the periphery. Moreover, the qualities offered by both firms are higher when the high-quality firm is on the periphery, showing a substitutability effect between location and quality. Thus, incentivizing the high-quality firm to locate on the periphery improves overall market quality.