A spatial model analysing firms' decision on accessibility improvement

Abstract

Firms can differentiate their products through improving their accessibilities so that it costs less for the consumers to collect information on firms' products. In this way, firms' products become more attractive to the consumers and thus more demand will be generated. However, this improvement requires a fair amount of investment from firms. This essay will use the spatial model, where two identical firms with fixed locations engage in a symmetric and simultaneous game, to analyse whether, and if so, when firms should invest to improve their accessibilities. Two cases where firms charge mill pricing and discriminatory pricing will be looked into as well. We conclude that firms should and will make the investment when, first, they have perfect information on consumers and charge discriminatory prices; second, when the cost investment incurred is sufficiently low. If, on the other hand, cost of investment is sufficiently large, then it is most optimal, economically and socially, for both firms to stay out of making such an investment.