We present a strategic dynamic game of location-price competition between two producers. In this game, producers are supposed to compete for socially interacting consumers - that is, consumers that are susceptible to one another's product choices. We derive the following results. If the strength of social interactions among consumers is lower than a critical value, then our model reproduces Hotelling's (1929) standard result: in Nash equilibrium the distance between product variants is maximal. By contrast, if the strength of social interactions among consumers is higher than this critical value, then the distance between product variants will be zero. The model suggests the existence of two types of oligopolies: one characterized by proximity of competitors, and the other, by their maximal distances. This is an interesting result that generalizes the standard results of location-price competition.

1. FULLTEXT: Phase transition of product locations due to social interactions of consumers, PDF document, version 1.2, 0.4MB

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