Summary
We consider a simple model of incomplete information in location theory. Two firms compete in a two stage framework: a sequential location stage and a price competition stage. Firm 1 knows both its own constant marginal cost technology and that of Firm 2, whereas the latter has incomplete information about firm 1's technology. The location stage turns out to be a monotonic signaling game and theunique D1 equilibrium is a pure strategy separating equilibrium if firm 1's cost advantage is below some bound, and otherwise a pooling equilibrium if the prior probability that Firm 1 is of the low cost type is high, or a semi-pooling equilibrium if it is low. This surprising result is due to the fact that the location gap between the two types of Firm 1 is bounded because of natural economic reasons, which may prevent the separation of the two types. Hence, incomplete information matters: the equilibrium locations differ quite significantly from the full information equilibrium locations.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Boyer, M., Laffont, J. J., Mahenc, P., Moreaux, M.: Location distortions under incomplete information. Reg. Sci. Urban Econ.24, 409–440 (1994)
Carlton, D. W.: A reexamination of delivered pricing systems. J. Law Econ.26, 51–70 (1983)
Cho, I. K., Sobel, J.: Strategic stability and uniqueness in signaling games. J. Econ. Theory50, 381–413 (1990)
D'Aspremont, C., Jaskold-Gabszewicz, J., Thisse, J. F.: On Hotelling stability in competition. Econometrica47, 1145–1150 (1979)
Greenhut, M. L., Norman, G., Hung, C. S.: The economics of imperfect competition: a spatial approach. Cambridge: Cambridge University Press 1987
Hobbs, B. F.: Mill pricing versus spatial price discrimination under Bertrand and Cournot spatial competition. J. Ind. Econ.35, 173–191 (1986)
Hoover, E. M. Jr.: Spatial price discrimination. Rev. Econ. Studies4, 182–191 (1937)
Hurter, A. P., Lederer, P. J.: Spatial duopoly with discriminatory pricing. Reg. Sci. Urban Econ.15, 541–553 (1985)
Jaskold-Gabszewicz, J., Thisse, J. F.: Spatial competition and the location of firms. In Lesourne, J., Sonnenschein, H. (eds.): Fundamentals of pure and applied economics. London: Harwood 1986
Jaskold-Gabszewicz, J., Thisse, J. F.: Location, in Aumann, R. J., Hart, S. (eds.): Handbook of game theory with economic applications. Amsterdam: North-Holland 1992
Lederer, P. J., Hurter, A. P.: Competition of firms: discriminatory pricing and location. Econometrica54, 623–640 (1986)
Milgrom, P., Roberts, J.: Limit pricing and entry under incomplete information: an equilibrium analysis. Econometrica50, 443–459 (1982)
Thisse, J. F., Vives, X.: On the strategic choice of spatial price policy. Amer. Econ. Rev.78, 122–137 (1988)
Author information
Authors and Affiliations
Additional information
We would like to thank an anonymous referee for very helpful comments and also the participants in seminars at GREQE (Marseille), Université de Montréal, UBC, HEC (Paris), in the Location Theory session of the World Congress of the Econometric Society (Barcelona) and in the Game Theory Conference at the University of Western Ontario for their comments. We remain, of course, solely responsible for the content of the paper. Financial support from FCAR (Québec), SSHRCC (Canada) and CNRS (France) is gratefully acknowledged.
Rights and permissions
About this article
Cite this article
Boyer, M., Laffont, JJ., Mahenc, P. et al. Sequential location equilibria under incomplete information. Econ Theory 6, 323–350 (1995). https://doi.org/10.1007/BF01212494
Received:
Revised:
Issue Date:
DOI: https://doi.org/10.1007/BF01212494