IDEAS home Printed from https://ideas.repec.org/a/kap/jeczfn/v131y2020i2d10.1007_s00712-020-00704-w.html
   My bibliography  Save this article

Two-dimensional vertical differentiation with attribute dependence

Author

Listed:
  • José A. Novo-Peteiro

    (University of A Coruña)

Abstract

This paper studies how the type and magnitude of the interaction between quality characteristics determine the nature of the differentiation strategies of firms. The vertical differentiation models with multi-characteristic product preferences consider that the characteristics are independent. We incorporate a non-additive component into a two-dimensional model. Sufficiently high attribute dependence gives rise to maximal differentiation in both qualities: if the qualities are complements, one firm offers the highest quality in both attributes, while the other firm the lowest; on the other hand, if the qualities are substitutes, each firm specializes in one of the qualities. The usual outcome with maximal differentiation in one quality dimension and minimal in the other is achieved if there is low or no attribute dependence. In our model, the magnitude of attribute dependence determines whether differentiation relaxes or intensifies subsequent price competition. Some examples from the banking sector are presented to illustrate the model.

Suggested Citation

  • José A. Novo-Peteiro, 2020. "Two-dimensional vertical differentiation with attribute dependence," Journal of Economics, Springer, vol. 131(2), pages 149-180, October.
    • Handle: RePEc:kap:jeczfn:v:131:y:2020:i:2:d:10.1007_s00712-020-00704-w
    DOI: 10.1007/s00712-020-00704-w
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s00712-020-00704-w
    File Function: Abstract
    Download Restriction: no
    File URL: https://libkey.io/10.1007/s00712-020-00704-w?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Ansari, A. & Economides, N. & Steckel, J., 1996. "The Max-Min-Min Principle of product Differentiation," Working Papers 96-10, New York University, Leonard N. Stern School of Business, Department of Economics.
    2. Barigozzi, Francesca & Ma, Ching-to Albert, 2018. "Product differentiation with multiple qualities," International Journal of Industrial Organization, Elsevier, vol. 61(C), pages 380-412.
    3. Baohong Sun & Jinhong Xie & H. Henry Cao, 2004. "Product Strategy for Innovators in Markets with Network Effects," Marketing Science, INFORMS, vol. 23(2), pages 243-254, October.
    4. David VanHoose, 2017. "The Industrial Organization of Banking," Springer Books, Springer, edition 2, number 978-3-662-54326-9, December.
    5. Baake, Pio & Boom, Anette, 2001. "Vertical product differentiation, network externalities, and compatibility decisions," International Journal of Industrial Organization, Elsevier, vol. 19(1-2), pages 267-284, January.
    6. Martín-Oliver, Alfredo & Salas-Fumás, Vicente, 2008. "The output and profit contribution of information technology and advertising investments in banks," Journal of Financial Intermediation, Elsevier, vol. 17(2), pages 229-255, April.
    7. Dominique Olié Lauga & Elie Ofek, 2011. "Product Positioning in a Two-Dimensional Vertical Differentiation Model: The Role of Quality Costs," Marketing Science, INFORMS, vol. 30(5), pages 903-923, September.
    8. Kim, Moshe & Kristiansen, Eirik Gaard & Vale, Bent, 2005. "Endogenous product differentiation in credit markets: What do borrowers pay for?," Journal of Banking & Finance, Elsevier, vol. 29(3), pages 681-699, March.
    9. Arnoud W. A. Boot & Anjan V. Thakor, 2000. "Can Relationship Banking Survive Competition?," Journal of Finance, American Finance Association, vol. 55(2), pages 679-713, April.
    10. Motta, Massimo, 1993. "Endogenous Quality Choice: Price vs. Quantity Competition," Journal of Industrial Economics, Wiley Blackwell, vol. 41(2), pages 113-131, June.
    11. Dos Santos Ferreira, Rodolphe & Thisse, Jacques-Francois, 1996. "Horizontal and vertical differentiation: The Launhardt model," International Journal of Industrial Organization, Elsevier, vol. 14(4), pages 485-506, June.
    12. Xavier Freixas & Jean-Charles Rochet, 2008. "Microeconomics of Banking, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062704, April.
    13. Irmen, Andreas & Thisse, Jacques-Francois, 1998. "Competition in Multi-characteristics Spaces: Hotelling Was Almost Right," Journal of Economic Theory, Elsevier, vol. 78(1), pages 76-102, January.
    14. Arnoud W. A. Boot & Matej Marinç, 2008. "The evolving landscape of banking," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 17(6), pages 1173-1203, December.
    15. Thakor, Anjan V. & Boot, Arnoud (ed.), 2008. "Handbook of Financial Intermediation and Banking," Elsevier Monographs, Elsevier, edition 1, number 9780444515582.
    16. Oz Shy, 2011. "A Short Survey of Network Economics," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 38(2), pages 119-149, March.
    17. repec:bla:jindec:v:45:y:1997:i:3:p:305-28 is not listed on IDEAS
    18. Marcel Canoy & Martin Peitz, 1997. "The Differentiation Triangle," Journal of Industrial Economics, Wiley Blackwell, vol. 45(3), pages 305-328, September.
    19. Tay, Abigail, 2003. "Assessing Competition in Hospital Care Markets: The Importance of Accounting for Quality Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 34(4), pages 786-814, Winter.
    20. Corrado Benassi & Alessandra Chirco & Caterina Colombo, 2019. "Vertical differentiation beyond the uniform distribution," Journal of Economics, Springer, vol. 126(3), pages 221-248, April.
    21. Astrid A. Dick, 2007. "Market Size, Service Quality, and Competition in Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(1), pages 49-81, February.
    22. Tabuchi, Takatoshi, 1994. "Two-stage two-dimensional spatial competition between two firms," Regional Science and Urban Economics, Elsevier, vol. 24(2), pages 207-227, April.
    23. Garella, Paolo G. & Lambertini, Luca, 2014. "Bidimensional vertical differentiation," International Journal of Industrial Organization, Elsevier, vol. 32(C), pages 1-10.
    24. Piga, Claudio & Poyago-Theotoky, Joanna, 2005. "Endogenous R&D spillovers and locational choice," Regional Science and Urban Economics, Elsevier, vol. 35(2), pages 127-139, March.
    25. Degryse, Hans, 1996. "On the Interaction between Vertical and Horizontal Product Differentiation: An Application to Banking," Journal of Industrial Economics, Wiley Blackwell, vol. 44(2), pages 169-186, June.
    26. Boot, Arnoud W. A., 2000. "Relationship Banking: What Do We Know?," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 7-25, January.
    27. Degryse, Hans & Kim, Moshe & Ongena, Steven, 2009. "Microeconometrics of Banking Methods, Applications, and Results," OUP Catalogue, Oxford University Press, number 9780195340471.
    28. DeYoung, Robert & Lang, William W. & Nolle, Daniel L., 2007. "How the Internet affects output and performance at community banks," Journal of Banking & Finance, Elsevier, vol. 31(4), pages 1033-1060, April.
    29. Mark B. Vandenbosch & Charles B. Weinberg, 1995. "Product and Price Competition in a Two-Dimensional Vertical Differentiation Model," Marketing Science, INFORMS, vol. 14(2), pages 224-249.
    30. Andrew Cohen & Michael Mazzeo, 2010. "Investment Strategies and Market Structure: An Empirical Analysis of Bank Branching Decisions," Journal of Financial Services Research, Springer;Western Finance Association, vol. 38(1), pages 1-21, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Keisuke Hattori & Keisaku Higashida, 2023. "Who should be regulated: Genuine producers or third parties?," Journal of Economics, Springer, vol. 138(3), pages 249-286, April.
    2. A. Cavaliere & G. Crea, 2022. "Brand premia driven by perceived vertical differentiation in markets with information disparity and optimistic consumers," Journal of Economics, Springer, vol. 135(3), pages 223-253, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. José A. Novo‐Peteiro, 2023. "Product design with attribute dependence," Manchester School, University of Manchester, vol. 91(4), pages 361-385, July.
    2. Barigozzi, Francesca & Ma, Ching-to Albert, 2018. "Product differentiation with multiple qualities," International Journal of Industrial Organization, Elsevier, vol. 61(C), pages 380-412.
    3. Hans Degryse & Andreas Irmen, 2001. "On the incentives to provide fuel-efficient automobiles," Journal of Economics, Springer, vol. 73(2), pages 149-165, June.
    4. Andrea Mangani & Paolo Patelli, 2002. "The Max-Min Principle of Product Differentiation: An Experimental Analysis," LEM Papers Series 2002/05, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    5. Degryse, Hans & Irmen, Andreas, 2001. "Attribute dependence and the provision of quality," Regional Science and Urban Economics, Elsevier, vol. 31(5), pages 547-569, September.
    6. Olivier Debande & Jean Luc De Meulemeester, 2008. "Quality and variety competition in higher education," DULBEA Working Papers 08-12.RS, ULB -- Universite Libre de Bruxelles.
    7. Hans Degryse & Steven Ongena, 2005. "Distance, Lending Relationships, and Competition," Journal of Finance, American Finance Association, vol. 60(1), pages 231-266, February.
    8. Garella, Paolo G. & Lambertini, Luca, 2014. "Bidimensional vertical differentiation," International Journal of Industrial Organization, Elsevier, vol. 32(C), pages 1-10.
    9. Yan, Yingchen & Zhao, Qiuhong & Qin, Zhongfeng & Sun, Gaoji, 2022. "Integration of development and advertising strategies for multi-attribute products under competition," European Journal of Operational Research, Elsevier, vol. 300(2), pages 490-503.
    10. Berger, Allen N. & Bouwman, Christa H.S., 2013. "How does capital affect bank performance during financial crises?," Journal of Financial Economics, Elsevier, vol. 109(1), pages 146-176.
    11. Ornelas, José Renato Haas & da Silva, Marcos Soares & Van Doornik, Bernardus Ferdinandus Nazar, 2022. "Informational switching costs, bank competition, and the cost of finance," Journal of Banking & Finance, Elsevier, vol. 138(C).
    12. Takatoshi Tabuchi, 2009. "Hotelling's Spatial Competition Reconsidered," CIRJE F-Series CIRJE-F-674, CIRJE, Faculty of Economics, University of Tokyo.
    13. Marco A. Marini & Ornella Tarola & Jacques-François Thisse, 2020. "Is Environmentalism the Right Strategy to Decarbonize the World?," Working Papers 2020.31, Fondazione Eni Enrico Mattei.
    14. Yogesh V. Joshi & David J. Reibstein & Z. John Zhang, 2016. "Turf Wars: Product Line Strategies in Competitive Markets," Marketing Science, INFORMS, vol. 35(1), pages 128-141, January.
    15. Subhadip Chakrabarti & Hans Haller, 2011. "An Analysis Of Advertising Wars," Manchester School, University of Manchester, vol. 79(1), pages 100-124, January.
    16. Marko Jakšič & Matej Marinč, 2019. "Relationship banking and information technology: the role of artificial intelligence and FinTech," Risk Management, Palgrave Macmillan, vol. 21(1), pages 1-18, March.
    17. Ongena, Steven & Şendeniz-Yüncü, İlkay, 2011. "Which firms engage small, foreign, or state banks? And who goes Islamic? Evidence from Turkey," Journal of Banking & Finance, Elsevier, vol. 35(12), pages 3213-3224.
    18. Coccorese, Paolo & Ferri, Giovanni, 2019. "Is competition among cooperative banks a negative sum game?," Journal of Institutional Economics, Cambridge University Press, vol. 15(4), pages 673-694, August.
    19. Tlili, Rim, 2012. "Comment justifier la multibancarité au sein des PME ?," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/10919 edited by Etner, François.
    20. Bouwman, Christa H. S., 2013. "Liquidity: How Banks Create It and How It Should Be Regulated," Working Papers 13-32, University of Pennsylvania, Wharton School, Weiss Center.

    More about this item

    Keywords

    Vertical differentiation; Attribute dependence; Oligopoly equilibrium; Nonprice competition;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:jeczfn:v:131:y:2020:i:2:d:10.1007_s00712-020-00704-w. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.