STRATEGIC CONTRACTS VERSUS MULTIPLE PLANTS: LOCATION UNDER SEQUENTIAL ENTRY

In this paper we explore the concept of a ‘strategic contract’ between two of three entrants that arrive sequentially in a spatial market and practise discriminatory pricing. We compare our results with those arising when two firms merge to create two plants. Although this second problem is superficially similar to the first, the underlying behavior and implications differ in crucial respects. The consequences, in terms of a variety of measures of welfare, of all of our results are demonstrated. We also consider the implications of the results for the so‐called ‘merger paradox’.