Location choices under quality uncertainty

We examine a linear city duopoly where firms choose their locations to maximize expected profits, uncertain about how consumers will assess the relative quality of their products. Equilibrium locations depend on the ratio of the expected quality superiority and the strength of horizontal differentiation. When this ratio is small, firms locate at opposite endpoints. As it becomes larger, agglomeration also emerges as an equilibrium with both firms choosing the same location within an interval around the center. Eventually, when the ratio is large enough, agglomeration becomes the only equilibrium and can occur at any point of the linear city. (c) 2005 Elsevier B.V. All rights reserved.