Location in a Vertically Differentiated Industry

We analyze a model of a vertically differentiated duopoly with two regions. These two locations differ for the market size or for the distribution of the willingness to pay for quality of their consumers. Firms sequentially choose to settle in one region and then simultaneously compete in prices, selling their products both on the local market and on the foreigner one. We show that the decision whether to agglomerate or not crucially depends on the extent of regions' asymmetries, but, counter-intuitively, there are parametric configurations in which the model predicts that the leader (the first firm choosing location) settles either in the poorer or in the smaller region, leaving the other one to the follower. Welfare analysis completes the paper