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Quality differentiation and entry choice between online and offline markets

Author

Listed:
  • Yijuan Chen
  • Xiangting Hu
  • Sanxi Li

Abstract

We study a model where an entrant chooses between online and offline markets to compete with an offline-market incumbent. When consumers buy a product from the online market, they cannot inspect the product's quality prior to purchase. Conventional wisdom and some literature suggest that this feature drives low-quality products to hide themselves in the online market. However, the literature on vertical product differentiation indicates that a firm may prefer to reveal its product quality in the offline market, because quality differentiation helps alleviate price competition. We show that under fairly general conditions the entrant will choose the offline market for not only the highest qualities but also the lowest ones, and choose the online market for intermediate qualities. While the average quality of the online good is lower than the incumbent's quality, the actual quality of the online good may be higher than that.

Suggested Citation

  • Yijuan Chen & Xiangting Hu & Sanxi Li, 2014. "Quality differentiation and entry choice between online and offline markets," ANU Working Papers in Economics and Econometrics 2014-620, Australian National University, College of Business and Economics, School of Economics.
    • Handle: RePEc:acb:cbeeco:2014-620
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    File URL: https://www.cbe.anu.edu.au/researchpapers/econ/wp620.pdf
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    References listed on IDEAS

    as
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    6. Oliver Board, 2009. "Competition And Disclosure," Journal of Industrial Economics, Wiley Blackwell, vol. 57(1), pages 197-213, March.
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    More about this item

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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