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On Transportation Cost and Product Differentiation in Hotelling’s Model

Author(s): Youping Li

Journal: Advances in Molecular Imaging
ISSN 2161-6728

Volume: 02;
Issue: 01;
Start page: 75;
Date: 2012;
Original page

Keywords: Hotelling’s Model | Transportation Cost | Product Differentiation

We model transportation cost in Hotelling’s model as a general exponential function and analyze firms’ location choice. As a first step, we take prices as exogenous and focus on the positioning strategy of the firm whose product generates a lower net-of-price utility. We find the firm locates further away from its competitor when the transportation cost (if convex) becomes more convex and when it (if concave) becomes more concave. Minimum differentiation is obtained when the transportation cost is linear in travel distance.
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