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Consumer Heterogeneity and Strategic Quality Decisions


  • Byong-Duk Rhee

    (John M. Olin School of Business, Washington University, St. Louis, Missouri 63130)


Though recent studies show that quality differentiation is an equilibrium outcome, products of similar qualities frequently are observed in the marketplace. This inconsistency may be explained by incorporating consumer heterogeneity along unobservable attributes into a model of competition. In this paper, consumers not only take into account the quality and price of a product but also their heterogeneous tastes along other attributes which are unobservable to firms. We investigate the effect of heterogeneity along the unobservable attributes on both quality and price equilibrium in a two-stage game framework. We show that when consumers are sufficiently heterogeneous along the unobservable attributes, the firms offer products of identical qualities in equilibrium. Under low levels of heterogeneity along the unobservable attributes, however, our results are consistent with past research which argues for quality differentiation.

Suggested Citation

  • Byong-Duk Rhee, 1996. "Consumer Heterogeneity and Strategic Quality Decisions," Management Science, INFORMS, vol. 42(2), pages 157-172, February.
  • Handle: RePEc:inm:ormnsc:v:42:y:1996:i:2:p:157-172

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    3. Ron Adner & Felipe A. Csaszar & Peter B. Zemsky, 2014. "Positioning on a Multiattribute Landscape," Management Science, INFORMS, vol. 60(11), pages 2794-2815, November.
    4. Chen, Jingxian & Liang, Liang & Yang, Feng, 2015. "Cooperative quality investment in outsourcing," International Journal of Production Economics, Elsevier, vol. 162(C), pages 174-191.
    5. Yang, Shilei & Munson, Charles L. & Chen, Bintong, 2010. "Using MSRP to enhance the ability of rebates to control distribution channels," European Journal of Operational Research, Elsevier, vol. 205(1), pages 127-135, August.
    6. Buechel, Berno & Roehl, Nils, 2015. "Robust equilibria in location games," European Journal of Operational Research, Elsevier, vol. 240(2), pages 505-517.
    7. Bernstein, Fernando & Song, Jing-Sheng & Zheng, Xiaona, 2008. ""Bricks-and-mortar" vs. "clicks-and-mortar": An equilibrium analysis," European Journal of Operational Research, Elsevier, vol. 187(3), pages 671-690, June.
    8. Zhu, Wenge & He, Yuanjie, 2017. "Green product design in supply chains under competition," European Journal of Operational Research, Elsevier, vol. 258(1), pages 165-180.
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    10. Altug, Mehmet Sekip, 2016. "Supply chain contracting for vertically differentiated products," International Journal of Production Economics, Elsevier, vol. 171(P1), pages 34-45.
    11. Chester Chambers & Panos Kouvelis & John Semple, 2006. "Quality-Based Competition, Profitability, and Variable Costs," Management Science, INFORMS, vol. 52(12), pages 1884-1895, December.
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    13. Christiaan Hogendorn, 2004. "Broadband Internet: Open Access and Content Competition," Wesleyan Economics Working Papers 2004-002, Wesleyan University, Department of Economics.
    14. R. Scott Hiller, 2016. "The importance of quality: How music festivals achieved commercial success," Journal of Cultural Economics, Springer;The Association for Cultural Economics International, vol. 40(3), pages 309-334, August.
    15. Rhee, Byong-Duk, 2006. "First-mover disadvantages with idiosyncratic consumer tastes along unobservable characteristics," Regional Science and Urban Economics, Elsevier, vol. 36(1), pages 99-117, January.


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