Location decisions: The role of uncertainty about consumer tastes

This paper analyzes to what extent firms make decisions about location based on uncertainty about consumer tastes. The model used in this analysis incorporates a linear city and quadratic consumer-transportation costs. In this framework, when firms choose locations, or in other words, choose the kind of product they are going to manufacture, they ignore the location, or real tastes, of their consumers. The existence of uncertainty raises the degree of product differentiation, because the anti-competitive effect that arises as distance from rivals increases counteracts the reduction in the degree of differentiation provided by the demand effect.