Tuesday, April 23, 2024

Vertical product differentiation, prominence, and costly search

Vertical product differentiation, prominence, and costly search

By:

Rozzi, Roberto; Schmitt, Stefanie Y.

Abstract:

In many markets, firms offering low-quality goods are more prominent than firms offering high-quality goods. Then, consumers are perfectly informed about the good of the prominent low-quality firm but incur search costs to bring the high-quality good of a competitor to mind. We analyze under which circumstances the less-prominent firm has an incentive to invest in high quality. We investigate two scenarios: (i) homogeneous and (ii) heterogeneous search costs. If search costs are homogeneous, the less-prominent firm produces highquality goods for sufficiently low search costs, and an increase in search costs reduces the range of values for which the less-prominent firm invests in high quality. In contrast, if search costs are heterogeneous, the less-prominent firm produces high-quality goods for sufficiently high search cost heterogeneity, and an increase in average search costs expands the range of values for which the less-prominent firm invests in high quality.

URL:

http://d.repec.org/n?u=RePEc:zbw:bamber:283000&r=ind

https://lawprofessors.typepad.com/antitrustprof_blog/2024/04/vertical-product-differentiation-prominence-and-costly-search.html

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