Research on the Location and Price Competition of Two Retailers with Elastic Demand

Hotelling model is an effective tool for studying the problem of horizontal differentiation. In this paper, we study the problem of location and pricing competition of two retailers with elastic demand. It is assumed that the consumers, located in a linear city, firstly choose the retailer to minimum the purchase cost including unit price and traffic cost. The purchase quantity is related to the distance from consumer to retail store and the price difference between two retail stores. The competitive equilibrium decisions of the two retailers are obtained by using game theory. The model is the extension of the classical Hotelling model.