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Consumer Heterogeneity and Strategic Quality Decisions

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  • Byong-Duk Rhee

    (John M. Olin School of Business, Washington University, St. Louis, Missouri 63130)

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    Abstract

    Though recent studies show that quality differentiation is an equilibrium outcome, products of similar qualities frequently are observed in the marketplace. This inconsistency may be explained by incorporating consumer heterogeneity along unobservable attributes into a model of competition. In this paper, consumers not only take into account the quality and price of a product but also their heterogeneous tastes along other attributes which are unobservable to firms. We investigate the effect of heterogeneity along the unobservable attributes on both quality and price equilibrium in a two-stage game framework. We show that when consumers are sufficiently heterogeneous along the unobservable attributes, the firms offer products of identical qualities in equilibrium. Under low levels of heterogeneity along the unobservable attributes, however, our results are consistent with past research which argues for quality differentiation.

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    File URL: http://dx.doi.org/10.1287/mnsc.42.2.157
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 42 (1996)
    Issue (Month): 2 (February)
    Pages: 157-172

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    Handle: RePEc:inm:ormnsc:v:42:y:1996:i:2:p:157-172

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    Related research

    Keywords: consumer heterogeneity; quality; unobservable attributes; logit; two-stage game; quality differentiation; unique versus identical qualities;

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    Cited by:
    1. Berno Buechel & Nils Roehl, 2013. "Robust Equilibria in Location Games," Working Papers 58, University of Paderborn, CIE Center for International Economics.
    2. Cirer-Costa, Joan Carles, 2013. "The role of geography in the success of the balearic tourism industry," MPRA Paper 47701, University Library of Munich, Germany.
    3. repec:syb:wpbsba:06/2013 is not listed on IDEAS
    4. Rhee, Byong-Duk, 2006. "First-mover disadvantages with idiosyncratic consumer tastes along unobservable characteristics," Regional Science and Urban Economics, Elsevier, vol. 36(1), pages 99-117, January.

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