Review of Industrial Organization
13: 557–567, 1998.
1998 Kluwer Academic Publishers. Printed in the Netherlands.
Product Location with Foresight
TIMOTHY L. SORENSON
Department of Economics and Finance, Albers School of Business and Economics, Seattle
University Seattle, Washington 98122, U.S.A.
Abstract. Traditional location literature concludes that ﬁrms will optimally differentiate in order
to alleviate a tendency toward competitive pricing. However, it has recently been shown that ﬁrms
will minimally differentiate if they (correctly) anticipate an absence of price competition. This paper
examines the relationship between product location and the sustainability of cooperative pricing, in
horizontally and vertically differentiated markets. Further, it describes equilibrium locations when
ﬁrms are able to choose their locations jointly and when they must choose independently.
Keywords: Product location, product differentiation, collusion.
JEL Classiﬁcation: D43, L13.
In line with d’Aspremont et al. (1979), traditional location literature (Prescott
and Visscher, 1977; Jaskold-Gabszewicz and Thisse, 1979; Shaked and Sutton,
1982; Economides, 1986; among many others) concludes that ﬁrms will optimally
differentiate their products in order to arrest a tendency toward competitive pricing.
As well, the “principle of differentiation” seems a fundamental tenet of marketing
and competitive strategy (see Kotler, 1994; Porter, 1980). More recently, however,
a number of reasons for minimal differentiation have emerged: to be where the
demand is, or might be (de Palma et al., 1985; Rhee et al., 1992);
higherdemandbyminimizing consumersearchcosts (Stahl, 1982; Wolinsky, 1983;
Dudey, 1990;Klemperer, 1992); or in line with the concerns addressedin this paper,
to exploit an absence of price competition (Jehiel, 1992; Friedman and Thisse,
1993; Sorenson, 1997). Absent price competition in a “horizontally differentiated”
The author thanks participants in the Industrial Organization and Natural Resource Economics
Workshop at the University of Washington for helpful discussion on a preliminary presentation of
Brieﬂy, if preferences are very diverse along an unobservable dimension, there is little reason to
differentiate along a related observable dimension. Other examples of “being where the demand is”
surely include bunched departure times among the airlines and prime-time television programming
(including cable, which got a jump by introducing a number of prime-time offerings during the 1996
network rerun season).