This paper examines optimal product positioning strategies of asymmetric firms in the context of retail outlet locations in the fast food industry. The relationships between profits and product differentiation reveal that both McDonald's and Burger King are better off avoiding close competition if the market area is large enough. However, in small market areas, McDonald's would prefer to be located together with Burger King rather than have the two outlets be only a slight distance apart. In contrast, Burger King's profits always increase with greater differentiation. Offsetting these incentives is the desirability of locating centrally to appeal to the most customers. The equilibrium depends on the market's size. In small markets, McDonald's locates near the center of the market, and Burger King locates to the side of the market. In larger markets, McDonald's and Burger King choose locations on opposite sides of the market, although McDonald's locates closer to the optimal central location than Burger King.
I also show that the role of price competition on product positioning is fundamentally different under asymmetric competition than under symmetric competition. Price competition unambiguously induces symmetric firms toward differentiation. In contrast, with asymmetric firms, price competition shifts Burger King's incentives toward locating closer to McDonald's, even while price competition increases McDonald's desire for differentiation. As a result, equilibrium locations with asymmetric firms are approximately the same, regardless of whether prices adjust with location.
