[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/12046.html
   My bibliography  Save this paper

Product Lines and Price Discrimination in Markets with Information Frictions

Author

Listed:
  • Fabra, Natalia
  • Montero, Juan Pablo
Abstract
A well known principle in economics is that firms differentiate their product offerings in order to relax competition. However, in this paper we show that in-formation frictions can invalidate this principle. We build a duopolistic model of second-degree price competition with information frictions in which (i) there always exists an equilibrium with overlapping qualities, whereas (ii) the equilibrium with non-overlapping qualities exists only when both information frictions and the costs of providing high quality are small enough. As a consequence, reasons other than the attempt to soften competition should be used to explain why firms in some cases carry non-overlapping product lines.

Suggested Citation

  • Fabra, Natalia & Montero, Juan Pablo, 2020. "Product Lines and Price Discrimination in Markets with Information Frictions," CEPR Discussion Papers 12046, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:12046
    as

    Download full text from publisher

    File URL: https://cepr.org/publications/DP12046
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Gilbert, Richard J & Matutes, Carmen, 1993. "Product Line Rivalry with Brand Differentiation," Journal of Industrial Economics, Wiley Blackwell, vol. 41(3), pages 223-240, September.
    2. Fabra, Natalia & Reguant, Mar, 2020. "A model of search with price discrimination," European Economic Review, Elsevier, vol. 129(C).
    3. Glenn Ellison, 2005. "A Model of Add-On Pricing," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(2), pages 585-637.
    4. Lars A. Stole, 1995. "Nonlinear Pricing and Oligopoly," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(4), pages 529-562, December.
    5. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-659, September.
    6. Champsaur, Paul & Rochet, Jean-Charles, 1989. "Multiproduct Duopolists," Econometrica, Econometric Society, vol. 57(3), pages 533-557, May.
    7. J. Miguel Villas-Boas, 2004. "Communication Strategies and Product Line Design," Marketing Science, INFORMS, vol. 23(3), pages 304-316, January.
    8. Justin P. Johnson & David P. Myatt, 2003. "Multiproduct Quality Competition: Fighting Brands and Product Line Pruning," American Economic Review, American Economic Association, vol. 93(3), pages 748-774, June.
    9. Johnson, Justin P. & Myatt, David P., 2015. "The properties of product line prices," International Journal of Industrial Organization, Elsevier, vol. 43(C), pages 182-188.
    10. Brander, James A & Eaton, Jonathan, 1984. "Product Line Rivalry," American Economic Review, American Economic Association, vol. 74(3), pages 323-334, June.
    11. Greg Kaplan & Guido Menzio & Leena Rudanko & Nicholas Trachter, 2019. "Relative Price Dispersion: Evidence and Theory," American Economic Journal: Microeconomics, American Economic Association, vol. 11(3), pages 68-124, August.
    12. Heski Bar-Isaac & Guillermo Caruana & Vicente Cunat, 2012. "Search, Design, and Market Structure," American Economic Review, American Economic Association, vol. 102(2), pages 1140-1160, April.
    13. Matthijs R. Wildenbeest, 2011. "An empirical model of search with vertically differentiated products," RAND Journal of Economics, RAND Corporation, vol. 42(4), pages 729-757, December.
    14. Shepard, Andrea, 1991. "Price Discrimination and Retail Configuration," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 30-53, February.
    15. Mark Armstrong, 2017. "Ordered Consumer Search," Journal of the European Economic Association, European Economic Association, vol. 15(5), pages 989-1024.
    16. Daniel Ershov, 2018. "Competing with Superstars in the Mobile App Market," Working Papers 18-02, NET Institute.
    17. Shelegia, Sandro, 2012. "Multiproduct pricing in oligopoly," International Journal of Industrial Organization, Elsevier, vol. 30(2), pages 231-242.
    18. Asher Wolinsky, 1986. "True Monopolistic Competition as a Result of Imperfect Information," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(3), pages 493-511.
    19. Justin P. Johnson & David P. Myatt, 2006. "Multiproduct Cournot oligopoly," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 583-601, September.
    20. Maarten Janssen & Sandro Shelegia, 2015. "Consumer Search and Double Marginalization," American Economic Review, American Economic Association, vol. 105(6), pages 1683-1710, June.
    21. Marc Möller & Makoto Watanabe, 2016. "Competition in the presence of individual demand uncertainty," RAND Journal of Economics, RAND Corporation, vol. 47(2), pages 273-292, May.
    22. Frank Verboven, 1999. "Product Line Rivalry and Market Segmentation—with an Application to Automobile Optional Engine Pricing," Journal of Industrial Economics, Wiley Blackwell, vol. 47(4), pages 399-425, December.
    23. Simon P. Anderson & Regis Renault, 1999. "Pricing, Product Diversity, and Search Costs: A Bertrand-Chamberlin-Diamond Model," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 719-735, Winter.
    24. Mark Armstrong, 2015. "Search and Ripoff Externalities," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 47(3), pages 273-302, November.
    25. Andrew Rhodes & Jidong Zhou, 2019. "Consumer Search and Retail Market Structure," Management Science, INFORMS, vol. 67(6), pages 2607-2623, June.
    26. Brian McManus, 2007. "Nonlinear pricing in an oligopoly market: the case of specialty coffee," RAND Journal of Economics, RAND Corporation, vol. 38(2), pages 512-532, June.
    27. Katja Seim & Michael Sinkinson, 2016. "Mixed pricing in online marketplaces," Quantitative Marketing and Economics (QME), Springer, vol. 14(2), pages 129-155, June.
    28. Avner Shaked & John Sutton, 1982. "Relaxing Price Competition Through Product Differentiation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 49(1), pages 3-13.
    29. Babur De Los Santos & Ali Hortacsu & Matthijs R. Wildenbeest, 2012. "Testing Models of Consumer Search Using Data on Web Browsing and Purchasing Behavior," American Economic Review, American Economic Association, vol. 102(6), pages 2955-2980, October.
    30. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
    31. Narasimhan, Chakravarthi, 1988. "Competitive Promotional Strategies," The Journal of Business, University of Chicago Press, vol. 61(4), pages 427-449, October.
    32. Borenstein, Severin & Rose, Nancy L, 1994. "Competition and Price Dispersion in the U.S. Airline Industry," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 653-683, August.
    33. Nocke, Volker & Peitz, Martin & Rosar, Frank, 2011. "Advance-purchase discounts as a price discrimination device," Journal of Economic Theory, Elsevier, vol. 146(1), pages 141-162, January.
    34. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-969, July.
    35. Crawford, Gregory S & Shum, Matthew, 2007. "Monopoly Quality Degradation and Regulation in Cable Television," Journal of Law and Economics, University of Chicago Press, vol. 50(1), pages 181-219, February.
    36. Klemperer, Paul, 1992. "Equilibrium Product Lines: Competing Head-to-Head May Be Less Competitive," American Economic Review, American Economic Association, vol. 82(4), pages 740-755, September.
    37. McAfee R. Preston, 1995. "Multiproduct Equilibrium Price Dispersion," Journal of Economic Theory, Elsevier, vol. 67(1), pages 83-105, October.
    38. Julian Romero, 2011. "The Effect of Hysteresis on Equilibrium Selection in Coordination Games," Purdue University Economics Working Papers 1265, Purdue University, Department of Economics.
    39. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, April.
    40. Dmitri Kuksov, 2004. "Buyer Search Costs and Endogenous Product Design," Marketing Science, INFORMS, vol. 23(4), pages 490-499, May.
    41. Meghan Busse & Marc Rysman, 2005. "Competition and Price Discrimination in Yellow Pages Advertising," RAND Journal of Economics, The RAND Corporation, vol. 36(2), pages 378-390, Summer.
    42. Daniel F Garrett & Renato Gomes & Lucas Maestri, 2019. "Competitive Screening Under Heterogeneous Information," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 86(4), pages 1590-1630.
    43. Eugenio J. Miravete & Lars-Hendrik Röller, 2004. "Estimating Price-Cost Markups Under Nonlinear Pricing Competition," Journal of the European Economic Association, MIT Press, vol. 2(2-3), pages 526-535, 04/05.
    44. Wernerfelt, Birger, 1986. "Product Line Rivalry: Note," American Economic Review, American Economic Association, vol. 76(4), pages 842-844, September.
    45. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
    46. José Luis Moraga-González & Zsolt Sándor & Matthijs R. Wildenbeest, 2017. "Prices and heterogeneous search costs," RAND Journal of Economics, RAND Corporation, vol. 48(1), pages 125-146, March.
    47. Esther Gal-Or, 1983. "Quality and Quantity Competition," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 590-600, Autumn.
    48. K. Sridhar Moorthy, 1988. "Product and Price Competition in a Duopoly," Marketing Science, INFORMS, vol. 7(2), pages 141-168.
    49. Aviv Nevo & Catherine Wolfram, 2002. "Why Do Manufacturers Issue Coupons? An Empirical Analysis of Breakfast Cereals," RAND Journal of Economics, The RAND Corporation, vol. 33(2), pages 319-339, Summer.
    50. Phillip Leslie, 2004. "Price Discrimination in Broadway Theater," RAND Journal of Economics, The RAND Corporation, vol. 35(3), pages 520-541, Autumn.
    51. Romero, Julian, 2015. "The effect of hysteresis on equilibrium selection in coordination games," Journal of Economic Behavior & Organization, Elsevier, vol. 111(C), pages 88-105.
    52. Ganesh Iyer & P.B. Seetharaman, 2003. "To Price Discriminate or Not: Product Choice and the Selection Bias Problem," Quantitative Marketing and Economics (QME), Springer, vol. 1(2), pages 155-178, June.
    53. Birger Wernerfelt, 1988. "Umbrella Branding as a Signal of New Product Quality: An Example of Signalling by Posting a Bond," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 458-466, Autumn.
    54. Han Hong & Matthew Shum, 2006. "Using price distributions to estimate search costs," RAND Journal of Economics, RAND Corporation, vol. 37(2), pages 257-275, June.
    55. Jidong Zhou, 2014. "Multiproduct Search and the Joint Search Effect," American Economic Review, American Economic Association, vol. 104(9), pages 2918-2939, September.
    56. Michael R. Baye & John Morgan, 2001. "Information Gatekeepers on the Internet and the Competitiveness of Homogeneous Product Markets," American Economic Review, American Economic Association, vol. 91(3), pages 454-474, June.
    57. Kristopher S. Gerardi & Adam Hale Shapiro, 2009. "Does Competition Reduce Price Dispersion? New Evidence from the Airline Industry," Journal of Political Economy, University of Chicago Press, vol. 117(1), pages 1-37, February.
    58. Andrew Rhodes, 2015. "Multiproduct Retailing," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 82(1), pages 360-390.
    59. Stole, Lars A., 2007. "Price Discrimination and Competition," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 34, pages 2221-2299, Elsevier.
    60. Stahl, Dale O, II, 1989. "Oligopolistic Pricing with Sequential Consumer Search," American Economic Review, American Economic Association, vol. 79(4), pages 700-712, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Fabra, Natalia & Reguant, Mar, 2020. "A model of search with price discrimination," European Economic Review, Elsevier, vol. 129(C).
    2. Anna Airoldi & Michele Polo, 2017. "Opening the Retail Electricity Markets: Puzzles, Drawbacks and Policy Options," IEFE Working Papers 97, IEFE, Center for Research on Energy and Environmental Economics and Policy, Universita' Bocconi, Milano, Italy.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Stole, Lars A., 2007. "Price Discrimination and Competition," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 34, pages 2221-2299, Elsevier.
    2. Andrew Rhodes & Jidong Zhou, 2019. "Consumer Search and Retail Market Structure," Management Science, INFORMS, vol. 67(6), pages 2607-2623, June.
    3. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899.
    4. Zhihong Chen & Zhiqi Chen, 2014. "Product Line Rivalry and Firm Asymmetry," Journal of Industrial Economics, Wiley Blackwell, vol. 62(3), pages 417-435, September.
    5. Richards, Timothy J. & Hamilton, Stephen F. & Allender, William, 2016. "Search and price dispersion in online grocery markets," International Journal of Industrial Organization, Elsevier, vol. 47(C), pages 255-281.
    6. Justin P. Johnson & David P. Myatt, 2006. "Multiproduct Cournot oligopoly," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 583-601, September.
    7. Hämäläinen, Saara, 2022. "Multiproduct search obfuscation," International Journal of Industrial Organization, Elsevier, vol. 85(C).
    8. Justin P. Johnson & David P. Myatt, 2003. "Multiproduct Quality Competition: Fighting Brands and Product Line Pruning," American Economic Review, American Economic Association, vol. 93(3), pages 748-774, June.
    9. Backus, Matthew R. & Podwol, Joseph Uri & Schneider, Henry S., 2014. "Search costs and equilibrium price dispersion in auction markets," European Economic Review, Elsevier, vol. 71(C), pages 173-192.
    10. Jidong Zhou, 2020. "Improved Information in Search Markets," Cowles Foundation Discussion Papers 2264R, Cowles Foundation for Research in Economics, Yale University, revised Jun 2022.
    11. Ganesh Iyer & Dmitri Kuksov, 2012. "Competition in Consumer Shopping Experience," Marketing Science, INFORMS, vol. 31(6), pages 913-933, November.
    12. Haizhen Lin & Yijia Wang, 2012. "Competition and Price Discrimination in the Parking Garage Industry," Working Papers 2012-07, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    13. Yi-Ling Cheng & Shin-Kun Peng, 2012. "Quality and Quantity Competition in a Multiproduct Duopoly," Southern Economic Journal, John Wiley & Sons, vol. 79(1), pages 180-202, July.
    14. Mariana Cunha & António Osório & Ricardo Ribeiro, 2016. "Endogenous product design and quality with rationally inattentive consumers," Working Papers de Economia (Economics Working Papers) 03, Católica Porto Business School, Universidade Católica Portuguesa.
    15. Martin Obradovits & Philipp Plaickner, 2023. "Price-Directed Search, Product Differentiation and Competition," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 63(3), pages 317-348, November.
    16. Bing Jing, 2007. "Product differentiation under imperfect information: When does offering a lower quality pay?," Quantitative Marketing and Economics (QME), Springer, vol. 5(1), pages 35-61, March.
    17. Justin P. Johnson & David P. Myatt, 2018. "The determinants of product lines," RAND Journal of Economics, RAND Corporation, vol. 49(3), pages 541-573, September.
    18. Chen, Yongmin & Zhang, Tianle, 2018. "Intermediaries and consumer search," International Journal of Industrial Organization, Elsevier, vol. 57(C), pages 255-277.
    19. Stephen Davies, Catherine Waddams Price, and Chris M. Wilson, 2014. "Nonlinear Pricing and Tariff Differentiation: Evidence from the British Electricity Market," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1).
    20. Moraga-González, José L. & Sándor, Zsolt & Wildenbeest, Matthijs R., 2014. "Prices, Product Differentiation, And Heterogeneous Search Costs," IESE Research Papers D/1097, IESE Business School.

    More about this item

    Keywords

    Product strategy; Pricing strategy; Second degree price discrimination; Search; Vertical differentiation; Retail competition;
    All these keywords.

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:12046. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://www.cepr.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.