PRODUCT DIFFERENTIATION, PRICING POLICY AND EQUILIBRIUM

This paper studies the price-location equilibrium of duopolists supply ing differentiated goods and competing in a spatial market with elasti c demand, We show that a price-location equilibrium exists under all t hree pricing policies traditionally considered by the literature: f.o. b. mill, uniform delivered, and spatially discriminatory pricing. We a lso show that firms always cluster at the market center. The second pa rt of the paper studies the endogenous choice of pricing policy. A sur prising feature of the resulting equilibrium is asymmetry. The greater the extent to which the goods are substitutes, the more likely is it that one firm will choose f.o.b. pricing and the other price discrimin ation. Finally, the welfare consequences of the analysis show some int eresting trade-offs.