Location distortions under incomplete information

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3 April 2018

In this paper we consider spatial competition between two firms which first choose sequentially their locations and then compete in prices, when there is incomplete information of the second mover firm about the first mover firm’s cost advantage. We completely characterize the pure strategy equilibria and we show how the equilibrium locations differ from the complete information locations, i.e. how incomplete information affects product differentiation. The natural bound created by space constraints on differentiation implies that Kreps’ intuitive criterion does not necessarily select the separating equilibrium as in a classical signaling model.