Competition and demand effects of geographic distance to rivals

Based on previous research in the literature of spatial economics and agglomeration, this study proposes that a firm's geographic distance to its rivals may have two opposite effects on prices which depend on the strength of local demand. In periods of high demand, the competition effect of proximity is relatively smaller than the benefits of being geographically close, which results in a positive net effect of proximity on prices. To the contrary, in periods of low demand, the negative competitive effect of proximity will be greater than the positive effect; therefore, the net effect of proximity on prices is negative. The results for a sample of 1838 hotels support the two contrary consequences. These findings contribute to increase our knowledge of the relation between geographical distance and prices in service industries in which competition is local and demand fluctuates over time.