|Recent studies of the impact of rising energy prices on firms' location decisions generally assume that the rise of energy prices has no impact on transportation costs of raw materials, intermediate goods, and consumer goods. Leaving out the energy price factor in transportation cost functions may create some bias in the discussion of the optimum location of firms. In this paper, the transportation cost effect of rising energy prices is included explicitly in a model of bilateral monopoly. It shows that the optimum location of firms will be affected by rising energy prices when both the buyer's and the seller's production functions are constant returns to scale. The final outcome depends on the relative strength of the impact of rising energy prices on various transportation rates. These results are quite different from the ones obtained in the previous papers, namely, Sakashita (1980), Hwang and Mai (1987), and Cheng and Shieh (1991).