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Vertical Differentiation in Frictional Product Markets

Author

Listed:
  • James Albrecht
  • Guido Menzio
  • Susan Vroman

Abstract

We study a search-theoretic model of imperfect competition in product markets where sellers make an ex ante investment in the quality of their product variety. Equilibrium exists and is unique. In equilibrium, search frictions not only cause sellers to offer different surpluses to buyers but also cause sellers to choose different qualities for their varieties. Equilibrium is efficient. As search frictions decline, the market becomes increasingly unbalanced, as a vanishing fraction of sellers produces varieties of increasing quality, offers increasing surplus to their customers, and captures an increasing share of the market, while a growing fraction of sellers produces varieties of decreasing quality. Gains from trade and welfare grow at constant rates.

Suggested Citation

  • James Albrecht & Guido Menzio & Susan Vroman, 2023. "Vertical Differentiation in Frictional Product Markets," Journal of Political Economy Macroeconomics, University of Chicago Press, vol. 1(3), pages 586-632.
    • Handle: RePEc:ucp:jpemac:doi:10.1086/725334
    DOI: 10.1086/725334
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    Cited by:

    1. Menzio, Guido, 2024. "Search theory of imperfect competition with decreasing returns to scale," Journal of Economic Theory, Elsevier, vol. 218(C).
    2. Cai, Xiaoming & Gautier, Pieter A. & Wolthoff, Ronald P., 2024. "Spatial Search," IZA Discussion Papers 16824, Institute of Labor Economics (IZA).

    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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