IDEAS home Printed from https://ideas.repec.org/p/acb/cbeeco/2014-620.html
   My bibliography  Save this paper

Quality differentiation and entry choice between online and offline markets

Author

Listed:
  • Yijuan Chen
  • Xiangting Hu
  • Sanxi Li

Abstract

We study a model where an entrant chooses between online and offline markets to compete with an offline-market incumbent. When consumers buy a product from the online market, they cannot inspect the product's quality prior to purchase. Conventional wisdom and some literature suggest that this feature drives low-quality products to hide themselves in the online market. However, the literature on vertical product differentiation indicates that a firm may prefer to reveal its product quality in the offline market, because quality differentiation helps alleviate price competition. We show that under fairly general conditions the entrant will choose the offline market for not only the highest qualities but also the lowest ones, and choose the online market for intermediate qualities. While the average quality of the online good is lower than the incumbent's quality, the actual quality of the online good may be higher than that.

Suggested Citation

  • Yijuan Chen & Xiangting Hu & Sanxi Li, 2014. "Quality differentiation and entry choice between online and offline markets," ANU Working Papers in Economics and Econometrics 2014-620, Australian National University, College of Business and Economics, School of Economics.
    • Handle: RePEc:acb:cbeeco:2014-620
    as

    Download full text from publisher

    File URL: https://www.cbe.anu.edu.au/researchpapers/econ/wp620.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Ginger Zhe Jin & Andrew Kato, 2007. "Dividing Online and Offline: A Case Study," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 74(3), pages 981-1004.
    2. Grossman, S J & Hart, O D, 1980. "Disclosure Laws and Takeover Bids," Journal of Finance, American Finance Association, vol. 35(2), pages 323-334, May.
    3. Belleflamme,Paul & Peitz,Martin, 2010. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9780521681599, November.
    4. Boyan Jovanovic, 1982. "Truthful Disclosure of Information," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 36-44, Spring.
    5. 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.
    6. Oliver Board, 2009. "Competition And Disclosure," Journal of Industrial Economics, Wiley Blackwell, vol. 57(1), pages 197-213, March.
    Full references (including those not matched with items on IDEAS)

    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. Chen, Yijuan & Hu, Xiangting & Li, Sanxi, 2017. "Quality differentiation and firms’ choices between online and physical markets," International Journal of Industrial Organization, Elsevier, vol. 52(C), pages 96-132.
    2. Levent Celik, 2014. "Information Unraveling Revisited: Disclosure of Horizontal Attributes," Journal of Industrial Economics, Wiley Blackwell, vol. 62(1), pages 113-136, March.
    3. Yijuan Chen & Xiangting Hu & Sanxi Li, 2014. "On firm choice between online and physical markets," ANU Working Papers in Economics and Econometrics 2014-619, Australian National University, College of Business and Economics, School of Economics.
    4. Ganesh Iyer & Shubhranshu Singh, 2022. "Persuasion Contest: Disclosing Own and Rival Information," Marketing Science, INFORMS, vol. 41(4), pages 682-709, July.
    5. Ginger Zhe Jin & Michael Luca & Daniel Martin, 2022. "Complex Disclosure," Management Science, INFORMS, vol. 68(5), pages 3236-3261, May.
    6. Tom Lane & Minghai Zhou, 2022. "Failure of unravelling theory? A natural field experiment on voluntary quality disclosure," Discussion Papers 2022-17, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
    7. Hong, Xianpei & Zhou, Menghuan & Gong, Yeming, 2021. "Dilemma of quality information disclosure in technology licensing," European Journal of Operational Research, Elsevier, vol. 294(2), pages 543-557.
    8. Oliver Board, 2009. "Competition And Disclosure," Journal of Industrial Economics, Wiley Blackwell, vol. 57(1), pages 197-213, March.
    9. Maxim Ivanov, 2013. "Information revelation in competitive markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 52(1), pages 337-365, January.
    10. Bilancini, Ennio & Boncinelli, Leonardo, 2013. "Disclosure of information in matching markets with non-transferable utility," Games and Economic Behavior, Elsevier, vol. 82(C), pages 143-156.
    11. Wang, Fa & Chen, Jing & Yang, Hui & Yu, Bo, 2022. "Supplier selection with information disclosure in the presence of uninformed consumers," International Journal of Production Economics, Elsevier, vol. 243(C).
    12. Guan, Xu & Wang, Yulan, 2022. "Quality disclosure in a competitive environment with consumer’s elation and disappointment," Omega, Elsevier, vol. 108(C).
    13. Liang Guo, 2020. "Upstream Exploitation and Strategic Disclosure," Marketing Science, INFORMS, vol. 39(5), pages 923-938, September.
    14. Panos Markopoulos & Kartik Hosanagar, 2013. "A Model of Product Design and Information Disclosure Investments," Working Papers 13-25, NET Institute.
    15. Agostino Manduchi, 2013. "Non-neutral information costs with match-value uncertainty," Journal of Economics, Springer, vol. 109(1), pages 1-25, May.
    16. Rroshi, Daniela & Weichselbaumer, Michael, 2021. "What is in a price? Evidence on quality signaling for experience goods," Department of Economics Working Paper Series 311, WU Vienna University of Economics and Business.
    17. Bruce Ian Carlin & Shaun William Davies & Andrew Miles Iannaccone, 2010. "Competing for Attention in Financial Markets," NBER Working Papers 16085, National Bureau of Economic Research, Inc.
    18. Levent Celik, 2014. "A More General Framework to Analyze Whether Voluntary Disclosure is Insufficient or Excessive," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 44(2), pages 161-178, March.
    19. Panos M. Markopoulos & Kartik Hosanagar, 2018. "A Model of Product Design and Information Disclosure Investments," Management Science, INFORMS, vol. 64(2), pages 739-759, February.
    20. Huan Cao & Xu Guan & Tijun Fan & Li Zhou, 2020. "The Acquisition of Quality Information in a Supply Chain with Voluntary vs. Mandatory Disclosure," Production and Operations Management, Production and Operations Management Society, vol. 29(3), pages 595-616, March.

    More about this item

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

    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:acb:cbeeco:2014-620. 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://edirc.repec.org/data/feanuau.html .

    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.