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Competitive Market Segmentation

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  • Silvio Sticher

Abstract

In a two-firm model where each firm sells a high-quality and a low-quality version of a product, customers differ with respect to their brand preferences and their attitudes towards quality. We show that the standard result of quality-independent markups crucially depends on the assumption that the customers' valuation of quality is identical across firms. Once we relax this assumption, competition across qualities leads to second-degree price discrimination. We find that markups on low-quality products are higher if consuming a low-quality product involves a firm-specific disutility. Likewise, markups on high-quality products are higher if consuming a high-quality product creates a firm-specific surplus.

Suggested Citation

  • Silvio Sticher, 2013. "Competitive Market Segmentation," Diskussionsschriften dp1313, Universitaet Bern, Departement Volkswirtschaft.
    • Handle: RePEc:ube:dpvwib:dp1313
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    References listed on IDEAS

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    More about this item

    Keywords

    price differentiation; vertical competition;

    JEL classification:

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

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