This paper proposes a theoretical model of spatial duopoly, where the location, on the one hand, and the absorptive capacity of firms as function of their internal R&D investment, on the other hand, endogenously determine the maximum level of knowledge spillovers firms might absorb. Our goal is to test whether this new modelling of spillovers affects the traditional outcomes in terms of firms location choices . We solve a three-stage game, where firms choose their geographical location, prior to their level of internal R&D expenditures, and finally compete in prices. We found that, at the optimum, firms choose the same level of internal R&D and set the same price, independently of their location. Moreover, firms locate symmetrically and tends to agglomerate in the center of the market as the transportation costs increase, knowledge spillovers being in that case maximum.