The purpose of this study is to explore the shopping behaviour of travellers as well as the strategic locations of the retail outlets by competing firms between two neighbouring destinations/countries. The basic model is built on the location theory pioneered by Hotelling (1929) in his famous linear city model. In location theory, generally, models are divided into two categories, namely, the inside location model (where firms are located inside the city limits) and the outside location model (where firms are located outside the city limits). The concerned analysis here is a mix of inside and outside location model i.e. we consider a situation where one firm is within the city whereas the other firm is outside the city. Firms are symmetric in every other aspect. The consumers are uniformly distributed along the city, and within the city. The firms compete in price and locations accepting the fact that outside firm cannot move inside the city. The choice of location and price is sequential; location is chosen first followed by price. We consider three types of transportation costs, namely linear, quadratic and linear-quadratic for the consumers and characterize all the price and location equilibria under different cost structures. We show that the relative prices charged by the competing firms depends on the transportation cost structure when the marginal consumer (who is indifferent between going either of the firms) is far from the boundary, whereas interestingly, it is independent of that when the marginal consumer is close to the boundary. On the other hand, the location of the outlets are independent of transportation costs, when costs are linear or quadratic in nature, it only depends on the transportation cost when cost structure is linear-quadratic.
(2003.06.18)