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Vertical Product Differentiation with Linear Pricing

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Abstract

This paper considers a monopolist that conducts vertical product differentiation. Previous analyses that assume customers have unit demand or firms conduct non-linear pricing. In contrast to these studies customers purchase multiple units at a linear price. Customers differ in their income and preferences, particularly their willingness to substitute between quantity and quality. The model distinguishes those aspects of customer demand that are sources of vertical differentiation (income and preferences) from those aspects that cause quality distortion. It is demonstrated that under uniform ordering vertical differentiation only causes quality distortion when consumer demand is such that there is a material difference in the mark-up of different varieties. Under non-uniform ordering a variety of patterns of quality distortion are possible.

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File URL: http://eprints.utas.edu.au/7341/1/DP2008_No_05_Sibly.pdf
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Bibliographic Info

Paper provided by University of Tasmania, School of Economics and Finance in its series Working Papers with number 7335.

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Length: 50 pages
Date of creation: 01 Jul 2008
Date of revision: 01 Jul 2008
Publication status: Published by the University of Tasmania. Discussion paper 2008-05
Handle: RePEc:tas:wpaper:7341

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  1. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
  2. David Levhari & Yoram Peles, 1973. "Market Structure, Quality and Durability," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 235-248, Spring.
  3. Hugh Sibly, 2009. "The Determinants Of The Quantity-Quality Balance In Monopoly ," Australian Economic Papers, Wiley Blackwell, vol. 48(1), pages 65-79, 03.
  4. Kim, Joo-Han & Kim, Jae-Cheol, 1996. "Quality choice of multiproduct monopolist and spill-over effect," Economics Letters, Elsevier, vol. 52(3), pages 345-352, September.
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  8. Srinagesh, P. & Bradburd, R.M., 1988. "Quality Distorsion By A Discriminating Monopolist," Department of Economics Working Papers 117, Department of Economics, Williams College.
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  13. Donnenfeld, Shabtai & White, Lawrence J, 1990. "Quality Distortion by a Discriminating Monopolist: Comment," American Economic Review, American Economic Association, vol. 80(4), pages 941-45, September.
  14. Eric Maskin & John Riley, 1984. "Monopoly with Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 171-196, Summer.
  15. Swan, Peter L, 1970. "Durability of Consumption Goods," American Economic Review, American Economic Association, vol. 60(5), pages 884-94, December.
  16. A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 417-429, Autumn.
  17. Stole, Lars A, 1995. "Nonlinear Pricing and Oligopoly," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(4), pages 529-62, Winter.
  18. Armstrong, Mark, 1996. "Multiproduct Nonlinear Pricing," Econometrica, Econometric Society, vol. 64(1), pages 51-75, January.
  19. David S. Sibley & Padmanabhan Srinagesh, 1997. "Multiproduct Nonlinear Pricing with Multiple Taste Characteristics," RAND Journal of Economics, The RAND Corporation, vol. 28(4), pages 684-707, Winter.
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