When does variety increase with quality?
Casual empiricism suggests higher quality is associated with greater variety. However, recent theoretical and empirical research has either not considered this link, or has been unable to establish unambiguous predictions about the relationship between quality and variety. In this paper we develop a simple model, which predicts that for low qualities variety should be positively correlated with quality and we establish conditions under which variety will either increase or decrease with quality at higher quality levels. The monopolist uses variety to increase the profitability of price discrimination across product lines of different qualities, by increasing the likelihood consumers choose high price products among products yielding the same utility. We show that the number of varieties offered by the monopolist is greater than the social optimum. The predictions of the model are supported by an analysis of the market for cars. A wide range of car manufacturers are found to offer a hump-shaped distribution of varieties.
|Date of creation:||02 Feb 2009|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://mpra.ub.uni-muenchen.de
More information through EDIRC
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.:
- Basov, S., 2001.
"Incentives for Boundedly Rational Agents,"
Department of Economics - Working Papers Series
813, The University of Melbourne.
- Suren Basov, 2009. "Monopolistic Screening with Boundedly Rational Consumers," The Economic Record, The Economic Society of Australia, vol. 85(s1), pages S29-S34, 09.
- CHAMPSAUR, Paul & ROCHET, Jean-Charles, .
CORE Discussion Papers RP
-854, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Drew Fudenberg & David K. Levine, 1998.
"The Theory of Learning in Games,"
MIT Press Books,
The MIT Press,
edition 1, volume 1, number 0262061945, June.
- M. Kandori & G. Mailath & R. Rob, 1999.
"Learning, Mutation and Long Run Equilibria in Games,"
Levine's Working Paper Archive
500, David K. Levine.
- Kandori, Michihiro & Mailath, George J & Rob, Rafael, 1993. "Learning, Mutation, and Long Run Equilibria in Games," Econometrica, Econometric Society, vol. 61(1), pages 29-56, January.
- Kandori, M. & Mailath, G.J., 1991. "Learning, Mutation, And Long Run Equilibria In Games," Papers 71, Princeton, Woodrow Wilson School - John M. Olin Program.
- Fudenberg, D. & Harris, C., 1992.
"Evolutionary dynamics with aggregate shocks,"
Journal of Economic Theory,
Elsevier, vol. 57(2), pages 420-441, August.
- Simon P. Anderson & Jacob K. Goeree & Charles A. Holt, 2004. "Noisy Directional Learning and the Logit Equilibrium," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(3), pages 581-602, October.
- Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
- Josef Hofbauer & William H. Sandholm, 2002. "On the Global Convergence of Stochastic Fictitious Play," Econometrica, Econometric Society, vol. 70(6), pages 2265-2294, November.
- Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, March.
- Michaela Draganska & Dipak C. Jain, 2006. "Consumer Preferences and Product-Line Pricing Strategies: An Empirical Analysis," Marketing Science, INFORMS, vol. 25(2), pages 164-174, 03-04.
- Young, H Peyton, 1993. "The Evolution of Conventions," Econometrica, Econometric Society, vol. 61(1), pages 57-84, January.
- Kelvin Lancaster, 1990. "The Economics of Product Variety: A Survey," Marketing Science, INFORMS, vol. 9(3), pages 189-206.
- Steven Berry & Ariel Pakes, 2007. "The Pure Characteristics Demand Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(4), pages 1193-1225, November.
- Michaela Draganska & Dipak C. Jain, 2005. "Product-Line Length as a Competitive Tool," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(1), pages 1-28, 03.
- Neven, D. & Thisse, J-F., 1989. "On Quality And Variety Competition," CORE Discussion Papers 1989020, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Steven M. Shugan, 1989. "Product Assortment in a Triopoly," Management Science, INFORMS, vol. 35(3), pages 304-320, March.
- Machina, Mark J, 1985. "Stochastic Choice Functions Generated from Deterministic Preferences over Lotteries," Economic Journal, Royal Economic Society, vol. 95(379), pages 575-94, September.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:13445. 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: (Ekkehart Schlicht)
If references are entirely missing, you can add them using this form.