1Economics 201 MicroeconomicsLocation gameFirms don’t only interact based on prices or quality of goods and services. Choosing a locationrelative to a competitor is an important decision.As with any model we have to single out the important variable (in this case location), so we willmake some assumptions to make this possible.• There are no physical restrictions … Continue reading “Location game | My Assignment Tutor”
1Economics 201 MicroeconomicsLocation gameFirms don’t only interact based on prices or quality of goods and services. Choosing a locationrelative to a competitor is an important decision.As with any model we have to single out the important variable (in this case location), so we willmake some assumptions to make this possible.• There are no physical restrictions on where a firm can locate (other buildings, parks, lakesetc.)• There are no legal restrictions on where a firm can locate (zoning laws etc.)• Customers are evenly distributed throughout the area.• Firms sell identical products (to remove the effects of brand loyalty, marketing strategies,quality differences etc.)• Two firms, Green’s and Scarlet’s – for simplicity.Given these assumptions, an efficient positioning would be the diagram below, left. Each firm has anequal market share and the distance that any customer has to travel to a store is minimised – it is anoptimal solution. However it is not a Nash Equilibrium. It can be seen in the diagram on the rightthat if Green’s relocates to be closer to Scarlet’s, then Green’s gains a larger market share (note thatthis is based on the assumptions that customers are choosing a firm depending on how close it is tothem and nothing else).Watch the video on Hotelling’s Model of Spatial Competition to see how the two firms will interactwhen this happens. You can probably predict that in this position, Scarlet’s will simply move to theright of Green’s. In fact, this interaction will continue until both firms are in the centre of the market.2In the position below, you can see that neither Green’s nor Scarlet’s can gain market share bychanging their location – if they move they lose (if Scarlet’s moved for example, we would go back tothe diagram above right).This is no longer optimal as customers have further to travel to get to the stores. Now we have a NashEquilibrium – sub optimal but the best we can get, given how the firms are expected to behave.3
