PARTIAL COLLUSION FOSTERS MINIMUM PRODUCT DIFFERENTIATION

We investigate a spatial duopoly in which the firms simultaneously sel ect locations at the beginning of time; once chosen, the locations are fixed forever, but the firms will choose prices in each of a countabl y infinite succession of time periods. We are interested in equilibriu m behavior when the firms will collusively arrange a trigger strategy equilibrium in prices, and will select their locations knowing that a particular such trigger strategy price equilibrium will ensue. Specifi cally, we restrict our attention to prices that support an outcome on the profit possibility frontier at which the ratio of firm 1's profits to those of firm 2 is positively related to the similar ratio of prof its at the single-shot noncooperative equilibrium. For these profit-sh aring rules the resulting location equilibrium is unique and involves the pairing of firms at the market center.