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Vertical product differentiation, prominence, and costly search

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  • Rozzi, Roberto
  • Schmitt, Stefanie Y.

Abstract

In many markets, firms offering low-quality goods are more prominent than firms offering high-quality goods. Then, consumers are perfectly informed about the good of the prominent low-quality firm but incur search costs to bring the high-quality good of a competitor to mind. We analyze under which circumstances the less-prominent firm has an incentive to invest in high quality. We investigate two scenarios: (i) homogeneous and (ii) heterogeneous search costs. If search costs are homogeneous, the less-prominent firm produces highquality goods for sufficiently low search costs, and an increase in search costs reduces the range of values for which the less-prominent firm invests in high quality. In contrast, if search costs are heterogeneous, the less-prominent firm produces high-quality goods for sufficiently high search cost heterogeneity, and an increase in average search costs expands the range of values for which the less-prominent firm invests in high quality.

Suggested Citation

  • Rozzi, Roberto & Schmitt, Stefanie Y., 2024. "Vertical product differentiation, prominence, and costly search," BERG Working Paper Series 190, Bamberg University, Bamberg Economic Research Group.
    • Handle: RePEc:zbw:bamber:283000
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    References listed on IDEAS

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    More about this item

    Keywords

    consideration sets; duopoly; prominence; search costs; vertical product differentiation;
    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
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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