When Consumers and Firms Share Transportation Costs

We consider a standard linear city model with two firms, where firms and consumers both incur transport costs. This is done by assuming that the total transport cost is shared by the buyers and sellers according to an exogenously given rule. In the model, firms choose locations and prices, with the transportation cost being linear in distance. We first derive the profit function for the two-stage transport cost sharing game and find that it has a complex form. We then invoke simplifying assumptions and solve for two different games. We provide a complete characterization for the equilibrium of the location game between the two firms by assuming fixed prices. We then examine the price game when the two firms are constrained to locate at the same spot. The equilibria of these two games provide insights about the complex two-stage game.