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Modeling Strategic Location Choices for Disadvantaged Firms

This paper models how a firm’s capability relative to that of the other firm affects his location choice in the marketplace. Weaker firms strategically avoid head-to-head competition with stronger ones. When the capability gap is small, weaker firms randomly visit the core market of competitors (the “dodge” strategy). By doing so, they can trigger competitors to leave the demands of boundary markets in order to defend their core markets. When the capability gap is medium, they focus their resources on niches to fight for survival (the “niche” strategy). These strategies differ from those of stronger firms, which defend on core markets when the capability gap is small and build new markets when the capability gap becomes larger. Results show that those location choices can be understood using game theoretical models – the Hotelling model and the Colonel Blotto game. The paper’s results also explain the empirical observation that small businesses are more likely than large firms to make radical investments in R&D.