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Transparency and Product Variety

  • Christian Schultz

    (Department of Economics, University of Copenhagen)

We study the long run e¤ects of transparency in a circular town model of a differentiated market. The market is not fully transparent on the consumer side: A fraction of consumers are uninformed about prices. Increasing transparency reduces the equilibrium price, profit and entry of firms. This improves welfare. If consumers' transportation cost is high, it also improves the average utility of consumers. When transportation costs are very small, the fully transparent market features cut throat competition if there are several firms in the market, and if firms choose pure entry strategies only one firm enters and acts like a monopolist. Consumers therefore prefer that market transparency is as high as possible under the restriction that the market should allow entry for two firms. If firms choose mixed entry strategies, consumers prefer full transparency.

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Paper provided by University of Copenhagen. Department of Economics. Centre for Industrial Economics in its series CIE Discussion Papers with number 2007-13.

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Length: 8 pages
Date of creation: Nov 2007
Date of revision:
Handle: RePEc:kud:kuieci:2007-13
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