Abstract

This thesis investigates how customer heterogeneity influences strategic decisions in locationpricing
problems within a duopoly setting. The market is modeled as a linear Hotelling line, where
two competing retailers must determine their location, pricing, and service strategies. Customers are
divided into two segments—premium and economy—each with distinct preferences and reservation
prices, capturing market heterogeneity.
Two market entry structures are considered: simultaneous and sequential. In the simultaneous
case, interactions are modeled using a Bertrand game; in the sequential case, a Stackelberg game
framework is employed. Multiple models are developed to explore how different customer distributions
and entry timings affect equilibrium outcomes.
The analysis reveals that customer heterogeneity significantly alters decisions. Retailers facing
a heterogeneous market adopt different pricing, location, and service strategies compared to homogeneous
settings. Furthermore, the spatial distribution of customers plays a critical role. When
customers are uniformly distributed, firms tend to differentiate in location while converging on pricing
and service levels. In contrast, non-uniform distributions lead to convergence across all strategic
dimensions.
The study also finds that in sequential entry scenarios, the follower may achieve higher profits
by offering superior service, especially in uniform markets. However, this advantage diminishes
when customer distribution is non-uniform. The results underscore the importance of incorporating
customer heterogeneity and spatial variation in analytical models, offering theoretical insights and
managerial implications for retail competition in diverse markets.