We introduce heterogeneity of production costs into the location-price Hotelling model discussed by d’Aspremont et al. (Econometrica 47:1145–1150, 1979). Maximum differentiation appears if the cost difference between two firms is small, whereas no pure strategy equilibrium exists if it is large. We examine the mixed strategy equilibria when no pure strategy equilibrium exists. We find that the following simple symmetric mixed strategy equilibrium exists, which never becomes an equilibrium if no cost differential exists: each firm chooses to locate at the two edges of the linear city randomly.
展开▼
