Location in the Hotelling duopoly model with demand uncertainty

Abstract

Demand uncertainty is introduced into a Hotelling environment with fixed prices by allowing random shocks to the desirability of the firm's product. Given these random shocks, the choice of location affects the average level of demand as well as the riskness of demand: reducing the distance to the other firm raises expected demand and payoff but also lowers the degree of differentiation between the firms, thus raising demand uncertainty. Risk averse firms will locate away from the center and, depending on degree of risk aversion, markup, and size of the market, may locate on either side of the quartile points.