Spatial agglomeration with vertical differentiation

This paper constructs a two-dimensional framework to take into consideration both horizontal and vertical differentiation. The focus of the paper is on the impact of vertical (quality) differentiation on the location configuration of firms. It shows that while the principle of minimum differentiation in location may be supported, the Pprinciple of maximum differentiation in location can never apply if firms engage in spatially discriminatory pricing. This paper proves that spatial agglomeration gives rise to the unique location equilibrium in both cases where firms charge uniform delivered and mill prices. Moreover, the location equilibria remain unchanged as quality is also endogenously determined.