Spatial Competition and the Core (Q3976900)

Hotelling's two-stage game in which firms first choose prices and then choose locations does not have a Nash equilibrium in pure strategies. This paper proposes a new model of the price subgame that ensures existence of an equilibrium in pure strategies. At the price formation stage, firms must select prices which support an allocation in the core of the market game, given firms' locations. This modelling captures the notion that consumers may seek discounts from competing merchants. Two models are solved. In one, firms observe consumer locations; in the other they cannot. For both models, the equilibrium locations for firms are the first and third quartiles. Thus, the firms minimize total transports costs. However, the resulting price schedules differ greatly.