Multi-product strategies and relative preferences for quality (original) (raw)
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Vertically Differentiated Monopoly with a Positional Good
Australian Economic Papers, 2002
We analyse positional effects in a monopoly market with vertical differentiation, comparing monopoly and social planning. The provision of quality under monopoly depends upon the relative size of positional effects and the hedonic evaluation of quality. An elitarian equilibrium where quality increases in the level of positional concern emerges under monopoly, only if the market is sufficiently rich. Under social planning, quality increases in the level of positional externality, independently of market affluency. As long as partial market coverage obtains under both regimes, the monopoly deadweight loss decreases as the positional externality becomes more relevant. 1 The linear model of horizontal differentiation with convex transportation costs is a special case of a vertical differentiation model with quadratic costs of quality improvements . Moreover, as in , if firms are allowed to locate also outside the linear segment along which consumers are distributed, then there exist location pairs giving rise to vertical differentiation . 2 The behaviour of a monopolist in a market where buyers' satisfaction increases in the number of consumers excluded from purchase is analysed in , who suggests that the positional concern may be traced back to either quality signalling by the firm or status seeking by consumers.
In this article we study patterns of vertical product differentiation in a multi-product monopoly using a random utility model. Prior research shows that applying such a model in a multi-product setting implies symmetric patterns of product differentiation in which all product variants of a single firm have the same characteristics. Assuming that preferences differ across consumers and allowing for unobserved demand heterogeneity, we numerically show the existence of asymmetric, fully differentiated, patterns of vertical product differentiation in which the monopolist maximises profits by setting prices and qualities. In particular, we show that the patterns of vertical product differentiation depend crucially on the level of unobserved demand heterogeneity and the observed dispersion of willingness to pay for quality. Only if unobserved demand heterogeneity is small relative to the observed dispersion, asymmetric, fully differentiated, equilibriums exist. Furthermore, we find in our model that the level of unobserved heterogeneity and the dispersion of willingness to pay for quality do not affect the relative welfare efficiency of the monopolist
Multiproduct Duopoly with Vertical Differentiation
The B.E. Journal of Theoretical Economics, 2011
This paper investigates a two-stage competition in a vertically differentiated industry, where each firm produces an arbitrary number of similar qualities and sells them to heterogeneous consumers. The number of products, qualities, prices, and the extent of the market coverage are endogenously determined. We show that when unit costs of quality improvement are increasing and quadratic, each firm has an incentive to provide a disconnected set of similar qualities approximating a continuum. The finding contrasts sharply with the single-quality outcome when the market coverage is exogenously determined. We also show that allowing for multiple qualities intensifies the level of competition, lowers the profit of each firm, and raises the consumer surplus and the social welfare in comparison to the single-quality duopoly.
Quality and Quantity Competition in a Multiproduct Duopoly
Southern Economic Journal, 2012
This article proposes a Cournot model of two-stage competition to examine the patterns of vertical product differentiation in a multiproduct duopoly. Firms simultaneously choose the number of products and their qualities at the first stage and compete in quantities at the second stage. We show that when the fixed setup cost of a product is high enough to result in a monopoly outcome, the monopolist always sells a single product. Moreover, in any equilibrium of a multiproduct duopoly, quality differentiation between them will develop into a nonsegmented pattern because each firm desires to avoid a strong effect of cannibalization. The set of equilibria reveals the properties of quality differentiation between multiproduct firms. In a multiproduct duopoly, the profit from a high-quality product can be lower than that from a low-quality product. This finding sharply contrasts with the literature on single-product firms, which finds the high-quality advantage.
Monopoly provision of product quality with uninformed buyers
International Journal of Industrial Organization, 1985
This essay is concerned with a monopolist's incentives to provide high quality goods when some of its customers cannot observe quality prior to purchase. We show that if all buyers have the same tastes for quality, the monopolist will not try to take advantage of the poorly informed. When tastes differ, however, some quality randomization may become profitable as a means to loosen binding self-~loction constraints. The profitability of randomization is shown to depend upon the relative degr©es of risk aversion of the buyers and on the convexity of the firm's cost of quality function. We view our results as pointing to some potential benefits from imperfect quality control. *This paper combines some earlier results contained in Ross (1981) and C, oper (1985). The authors gratefully acknowledge the helpful comments received from
Price Competition When Consumersare Uncertain About Which Firm Sells Which Quality
Journal of Economics & Management Strategy, 1992
In this paper we analyze the properties of price equilibria in a duopoly market where firms sell vertically differentiated products, consumers being uncertain about which firm sells which quality. Both existence and properties of price equilibria are characterized by the beliefs of the consumers' population about the distribution of quality between firms.
Mixed Oligopoly, Vertical Product Differentiation and Fixed Quality-Dependent Costs
SSRN Electronic Journal, 2000
A private and a public firm face fixed quality-dependent costs of production and compete first in quality and then either in prices or in quantities. In the long run the public firm targets welfare maximization whereas the private firm maximizes profits. In the short run both firms compete in prices or quantities to maximize profits.
Monopoly Versioning of Information Goods When Consumers Have Group Tastes
Production and Operations Management, 2014
Large sunk costs of development, negligible costs of reproduction and distribution resulting in economies of scale distinguish information goods from physical goods. Versioning is a way firms may take advantage of these properties. However, in a baseline model where consumers differ in their tastes for quality, an information goods monopolist only offers one version, and this differs from what we observe in practice. We explore formulations that add features to the baseline model that result in a monopolist offering multiple versions. We examine versioning where consumers differ in individual tastes for quality, and groups of consumers that share the same group taste are delineated by segments of individual tastes. We find that if groups have mutually exclusive characteristics-a horizontal dimension-that they value relative to the shared characteristics, then versioning is optimal. Consequently, any horizontal differentiation in product line design favors versioning. In addition, when group tastes are hierarchical such that higher taste groups value characteristics that lower taste groups value but not vice versa-a vertical dimension, as long as the valuations of the higher and adjacent lower taste group are sufficiently close, then versioning is also optimal. Our conditions, which also help determine how many versions are optimal, are based on exogenously defined parameters so that it is feasible to check them in practice.
Monopoly regulation, quality choice and welfare
Economics Letters, 1984
We extend the analysis of regulation to the case where a domestic monopolist produces goods of variable quality and is facing competition from foreign firms. In contrast with the closed economy case, we show that because of import competition.