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Product Differentiation by Competing Vertical Hierarchies

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  • Matteo Bassi
  • Marco Pagnozzi
  • Salvatore Piccolo

Abstract

type="main"> We revisit the choice of product differentiation in the Hotelling model, by assuming that competing firms are vertically separated, and that retailers choose products' characteristics. The “principle of differentiation” does not hold because retailers with private information about their marginal costs produce less differentiated products in order to increase their information rents. Hence, information asymmetry within vertical hierarchies may increase social welfare by inducing them to sell products that appeal to a larger number of consumers. We show that the socially optimal level of transparency between manufacturers and retailers depends on the weight assigned to consumers' surplus and trades off two effects: higher transparency reduces price distortion but induces retailers to produce excessively similar products.

Suggested Citation

  • Matteo Bassi & Marco Pagnozzi & Salvatore Piccolo, 2015. "Product Differentiation by Competing Vertical Hierarchies," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 24(4), pages 904-933, October.
  • Handle: RePEc:bla:jemstr:v:24:y:2015:i:4:p:904-933
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    File URL: http://hdl.handle.net/10.1111/jems.12115
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    References listed on IDEAS

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    1. repec:kap:jeczfn:v:121:y:2017:i:3:d:10.1007_s00712-017-0533-9 is not listed on IDEAS
    2. repec:kap:revind:v:52:y:2018:i:1:d:10.1007_s11151-017-9568-x is not listed on IDEAS
    3. Yang, Jinrui, 2016. "Monopoly VS Competition: Market Structure’s Impact on Product Innovation-with Endogenous Quality of New Product," MPRA Paper 70094, University Library of Munich, Germany.
    4. Marco Pagnozzi & Salvatore Piccolo & Matteo Bassi, 2016. "Entry and Product Variety with Competing Supply Chains," Journal of Industrial Economics, Wiley Blackwell, vol. 64(3), pages 520-556, September.

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