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Niche products, generic products, and consumer search

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  • Larson, Nathan

Abstract

We endogenize product differentiation in a model of sequential search with random firm-consumer match value à la Wolinsky (1986) and Anderson and Renault (1999). We focus on a product design choice by which a firm can control the dispersion of consumer valuations for its product; we interpret low dispersion products as ‘generic’ and high dispersion products as ‘nichy.’ Equilibrium product design depends on a feedback loop: when reservation utility is high (low), the marginal customer’s match improves (worsens) with more nichy products, encouraging high (low) differentiation by firms. In turn, when firms offer more nichy products, this induces more intense search; depending on search costs, this could raise or lower consumers’ reservation utility. Remarkably, when the match distribution satisfies a hazard rate condition, firm and consumer interests align: equilibrium product design always adjusts to the level that maximizes utility. When this condition is not met, either multiple equilibria (one nichy, the other generic) or one asymmetric equilibrium (generic and nichy firms coexist) can arise; we argue that the former is more likely for common specifications of consumer preferences.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 32161.

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Date of creation: 2008
Date of revision: 2011
Handle: RePEc:pra:mprapa:32161

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Keywords: product differentiation; product design; search;

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References

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  1. Perloff, Jeffrey M & Salop, Steven C, 1985. "Equilibrium with Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 52(1), pages 107-20, January.
  2. Maria Arbatskaya, 2007. "Ordered search," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 119-126, 03.
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  5. Mark Armstrong & John Vickers & Jidong Zhou, 2008. "Prominence and Consumer Search," Economics Series Working Papers 379, University of Oxford, Department of Economics.
  6. Ali Hortaç Su & Chad Syverson, 2004. "Product Differentiation, Search Costs, And Competition in the Mutual Fund Industry: A Case Study of S&P 500 Index Funds," The Quarterly Journal of Economics, MIT Press, vol. 119(2), pages 403-456, May.
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  17. Butters, Gerard R, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 465-91, October.
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Cited by:
  1. Heski Bar-Isaac & Guillermo Caruana & Vicente Cunat, 2012. "Search, Design, and Market Structure," American Economic Review, American Economic Association, vol. 102(2), pages 1140-60, April.
  2. S. Nuray Akin & Brennan Platt, 2012. "A theory of search with deadlines and uncertain recall," Working Papers 2012-3, University of Miami, Department of Economics.

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