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When does variety increase with quality?

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Author Info
Basov, Suren
Danilkina, Svetlana
Prentice, David

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Abstract

Casual empiricism suggests higher quality is associated with greater variety. However, recent theoretical and empirical research has either not considered this link, or has been unable to establish unambiguous predictions about the relationship between quality and variety. In this paper we develop a simple model, which predicts that for low qualities variety should be positively correlated with quality and we establish conditions under which variety will either increase or decrease with quality at higher quality levels. The monopolist uses variety to increase the profitability of price discrimination across product lines of different qualities, by increasing the likelihood consumers choose high price products among products yielding the same utility. We show that the number of varieties offered by the monopolist is greater than the social optimum. The predictions of the model are supported by an analysis of the market for cars. A wide range of car manufacturers are found to offer a hump-shaped distribution of varieties.

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File URL: http://mpra.ub.uni-muenchen.de/13445/
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Publisher Info
Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 13445.

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Date of creation: 02 Feb 2009
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Handle: RePEc:pra:mprapa:13445

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Related research
Keywords: Price discrimination; product variety; bounded rationality; cars.;

Find related papers by JEL classification:
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment
D8 - Microeconomics - - Information, Knowledge, and Uncertainty
L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
D4 - Microeconomics - - Market Structure and Pricing

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Champsaur, Paul & Rochet, Jean-Charles, 1989. "Multiproduct Duopolists," Econometrica, Econometric Society, vol. 57(3), pages 533-57, May. [Downloadable!] (restricted)
  2. Fudenberg, Drew & Harris, Christopher, 1992. "Evolutionary Dynamics with Aggregate Shocks," IDEI Working Papers 13, Institut d'Économie Industrielle (IDEI), Toulouse.
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  3. Machina, Mark J, 1985. "Stochastic Choice Functions Generated from Deterministic Preferences over Lotteries," Economic Journal, Royal Economic Society, vol. 95(379), pages 575-94, September. [Downloadable!] (restricted)
  4. Steven Berry & Ariel Pakes, 2007. "The Pure Characteristics Demand Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(4), pages 1193-1225, November. [Downloadable!] (restricted)
  5. repec:bep:thetop:v:3:y:2003:i:1:p:1093-1093 is not listed on IDEAS
  6. Young, H Peyton, 1993. "The Evolution of Conventions," Econometrica, Econometric Society, vol. 61(1), pages 57-84, January. [Downloadable!] (restricted)
  7. Josef Hofbauer & William H. Sandholm, 2002. "On the Global Convergence of Stochastic Fictitious Play," Econometrica, Econometric Society, vol. 70(6), pages 2265-2294, November. [Downloadable!] (restricted)
  8. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July. [Downloadable!] (restricted)
  9. Simon P. Anderson & Jacob K. Goeree & Charles A. Holt, 2004. "Noisy Directional Learning and the Logit Equilibrium," Scandinavian Journal of Economics, Blackwell Publishing, vol. 106(3), pages 581-602, October. [Downloadable!] (restricted)
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