Product Variety and Demand Uncertainty
We show that demand uncertainty leads to vertical product differentiation even when consumers are homogeneous. When a firm anticipates that its inventory or capacity may not be fully utilized, product variety can reduce its expected costs of excess capacity. When the firm offers a continuum of product varieties, the highest quality product has the highest profit margins but the lowest percentage margin, while the lowest quality product has the highest percentage margin but the lowest absolute margin. We derive these results in both a monopoly model and a variety of different competitive models. We conclude with a discussion of empirical predictions together with a brief discussion of supporting evidence available from marketing studies.
|Date of creation:||Jun 2004|
|Date of revision:|
|Publication status:||published as Carlton, Dennis W. and James D. Dana Jr. “Product Variety and Demand Uncertainty: Why Mark-ups Vary with Quality.” Journal of Industrial Economics (2008).|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.org
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Robert Barsky & Mark Bergen & Shantanu Dutta & Daniel Levy, 2002.
"What Can the Price Gap between Branded and Private Label Products Tell Us about Markups?,"
2002-02, Bar-Ilan University, Department of Economics.
- Robert B. Barsky & Mark Bergen & Shantanu Dutta & Daniel Levy, 2003. "What Can the Price Gap between Branded and Private-Label Products Tell Us about Markups?," NBER Chapters, in: Scanner Data and Price Indexes, pages 165-228 National Bureau of Economic Research, Inc.
- Robert Barsky & Mark Bergen & Shantanu Dutta & Daniel Levy, 2001. "What Can the Price Gap between Branded and Private Label Products Tell Us about Markups?," NBER Working Papers 8426, National Bureau of Economic Research, Inc.
- D. W. Carlton, 1976.
"Market Behavior With Demand Uncertainty and Price Inflexibility,"
179, Massachusetts Institute of Technology (MIT), Department of Economics.
- Carlton, Dennis W, 1978. "Market Behavior with Demand Uncertainty and Price Inflexibility," American Economic Review, American Economic Association, vol. 68(4), pages 571-87, September.
- Curtis Eaton, B. & Lipsey, Richard G., 1989. "Product differentiation," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 12, pages 723-768 Elsevier.
- Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
- James D. Dana & Jr., 1998. "Advance-Purchase Discounts and Price Discrimination in Competitive Markets," Journal of Political Economy, University of Chicago Press, vol. 106(2), pages 395-422, April.
- Prescott, Edward C, 1975. "Efficiency of the Natural Rate," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1229-36, December.
- S. Baranzoni & P. Bianchi & L. Lambertini, 2000. "Market Structure," Working Papers 368, Dipartimento Scienze Economiche, Universita' di Bologna.
- Shepard, Andrea, 1991. "Price Discrimination and Retail Configuration," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 30-53, February.
- Eden, Benjamin, 1990. "Marginal Cost Pricing When Spot Markets Are Complete," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1293-1306, December.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:10594. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.