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Vertical Differentiation Through Product Design

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  • Max Riegel

Abstract

I study pricing and product design choices of multiproduct firms in a model of directed search. Product design introduces vertical differentiation à la Gabszewicz and Thisse (1979) as well as Shaked and Sutton (1982). While all consumers have a preference for a more niche product design, consumers with lower search costs benefit relatively more. Firms gain from dispersion in tastes through product design and choose maximum differentiation in equilibrium. The firm with the broader product design sets a lower price and attracts consumers with high search costs.

Suggested Citation

  • Max Riegel, 2024. "Vertical Differentiation Through Product Design," CRC TR 224 Discussion Paper Series crctr224_2024_556, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2024_556
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    File URL: https://www.crctr224.de/research/discussion-papers/archive/dp556
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    References listed on IDEAS

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    More about this item

    Keywords

    product design; vertical differentiation; consumer search; directed search; search cost heterogeneity;
    All these keywords.

    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
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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