Location Choice and Entry Timing under Uncertainty: A Dynamic Hotelling Model with Location-Dependent Premium Rates

Abstract

This paper develops a dynamic extension of the Hotelling model in which firms choose locations prior to entry and optimally determine entry timing under uncertainty. By embedding spatial competition into a real-options framework, the model allows firms to delay irreversible investment until market conditions become sufficiently favorable. A key innovation is the introduction of a location-dependent discount premium, which endogenously links firms’ spatial configuration to the intertemporal valuation of future profit streams. Unlike a standard exit hazard, this premium captures gradual erosion of project value arising from benefits of agglomeration, knowledge spillovers and so on. We show that location choices affect not only post-entry price competition but also the effective discount rate governing the value of waiting and the optimal entry threshold. As a result, location choice and entry timing are jointly determined. Under reasonable conditions, this dynamic mechanism overturns the classical prediction of maximal differentiation in the static Hotelling model, leading firms to choose interior locations rather than the market endpoints. The analysis highlights a novel channel through which spatial configuration shapes dynamic investment incentives and provides a unified framework integrating spatial competition and real-options theory.