Location distortions under incomplete information

doi:10.1016/0166-0462(93)02048-8

Regional Science and Urban Economics

Volume 24, Issue 4, August 1994, Pages 409-440

https://doi.org/10.1016/0166-0462(93)02048-8 Get rights and content

Abstract

In this paper we consider spatial competition between two firms which first choose sequentially their locations and then compete in prices, when there is incomplete information of the second mover firm about the first mover firm's cost advantage. We completely characterize the pure strategy equilibria and we show how the equilibrium locations differ from the complete information locations, i.e. how incomplete information affects product differentiation. The natural bound created by space constraints on differentiation implies that Kreps' intuitive criterion does not necessarily select the separating equilibrium as in a classical signaling model.

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Citation Excerpt :
This also, may make moving first more valuable and change the structure of the game of timing. Another possible interesting extension of the above would be to examine the timing of the game along the lines of Boyer et al. (1994), that is, under incomplete information. With incomplete information it may be possible that each firm thinks it is the high cost firm and refuses to enter until after the other firm which may lead to an equilibrium where neither firm enters, i.e., the timing of entry would signal what firms believe are their relative costs.
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We show that location can serve as a signal which deters or accommodates entry when there is asymmetric cost information. Location may allow or prevent the entrant from inferring the incumbent’s cost advantage. The analysis provides two new insights. First, the market center may be used to deter entry by a high cost incumbent who would accommodate entry under complete information. Second, a low cost incumbent may accommodate entry and locate away from the center, while she would deter entry by locating at the center under complete information.
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We know from Boyer et al. (1994, 1995) that it is not true.
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Perception and information in a competitive location model
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This paper considers a situation in which two competitors locate one facility each at the vertices of a tree. Their decisions are based on the capture of demands at the vertices of the tree. As opposed to the usual models, it is assumed that the true demands are unknown and that each competitor has its own perception of them. The paper investigates a facility planner's advantage that results from knowledge concerning his competitor's perception. Stackelberg solutions are analyzed as well as possible advantages to the competitor who locates first.
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This paper explores the strategic properties of pricing rules. We show that spatial price discrimination may be used for entry deterrence purposes, while f.o.b. pricing policies are better to accommodate entry. Commitment to a pricing policy changes the form of competition in the post-entry game. Discriminatory pricing makes the incumbent `tough' whereas f.o.b. makes the incumbent `soft' and is the optimal policy when entry has to be accommodated. When there is no commitment to a pricing policy, under asymmetric information, the existing firm may use delivered pricing policies to deter entry.

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^†: We wish to thank participants in seminars at GREQE (Marseille), Université de Montréal, UBC, Groupe HEC (Paris) and in the Location Theory session of the World Congress of the Econometric Society (Barcelona) for their comments. Comments by two anonymous referees and by K. Stahl were also quite helpful in improving the paper. Financial support from FCAR, SSHRC and CNRS is gratefully acknowledged.

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Location distortions under incomplete information

Abstract

International Journal of Industrial Organization

Regional Science and Urban Economics

On Hotelling stability in competition

Econometrica

The missing equilibria in Hotelling's location game

Sequential Location equilibria under incomplete information

Economic Theory

Signaling games and stable equilibria

Quarterly Journal of Economics

Game theory