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Product quality, competition, and multi-purchasing

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  • Anderson, Simon P
  • Foros, Øystein
  • Kind, Hans Jarle

Abstract

In a Hotelling duopoly model, we introduce quality that is more appreciated by closer consumers. Then higher common quality raises equilibrium prices, in contrast to the standard neutrality result. Furthermore, we allow consumers to buy one out of two goods (single-purchase) or both (multi-purchase). Prices are strategically independent when some consumers multi-purchase because suppliers price the incremental benefit to marginal consumers. In a multi-purchase regime, there is a hump-shaped relationship between equilibrium prices and quality when quality functions overlap. If quality is sufficiently good, it might be a dominant strategy for each supplier to price high and eliminate multi-purchase.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8923.

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Date of creation: Apr 2012
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Handle: RePEc:cpr:ceprdp:8923

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Keywords: content competition; hotelling model with quality; incremental pricing; multi-purchase;

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References

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Cited by:
  1. Brandão, António & Correia-da-Silva, João & Pinho, Joana, 2014. "Spatial competition between shopping centers," Journal of Mathematical Economics, Elsevier, vol. 50(C), pages 234-250.

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