ABSTRACT We investigate the effects of restricting the locations of firms in Hotelling duopoly models. In standard location-price models, the equilibrium distance between firms is too great from the viewpoint of consumer welfare. Thus, restricting the locations of firms and shortening the distance between them improves consumer welfare by reducing prices and transport costs. We introduce strategic reward contracts into location-price models and find that, in contrast to the above result, restrictions on the locations of firms reduce consumer welfare. These restrictions reduce transport costs but increase prices by changing the strategic commitments of the firms.