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Niche products, generic products, and consumer search

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  • Larson, Nathan

Abstract

We endogenize product differentiation in a model of sequential search with random firm-consumer match value à la Wolinsky (1986) and Anderson and Renault (1999). We focus on a product design choice by which a firm can control the dispersion of consumer valuations for its product; we interpret low dispersion products as ‘generic’ and high dispersion products as ‘nichy.’ Equilibrium product design depends on a feedback loop: when reservation utility is high (low), the marginal customer’s match improves (worsens) with more nichy products, encouraging high (low) differentiation by firms. In turn, when firms offer more nichy products, this induces more intense search; depending on search costs, this could raise or lower consumers’ reservation utility. Remarkably, when the match distribution satisfies a hazard rate condition, firm and consumer interests align: equilibrium product design always adjusts to the level that maximizes utility. When this condition is not met, either multiple equilibria (one nichy, the other generic) or one asymmetric equilibrium (generic and nichy firms coexist) can arise; we argue that the former is more likely for common specifications of consumer preferences.

Suggested Citation

  • Larson, Nathan, 2008. "Niche products, generic products, and consumer search," MPRA Paper 32161, University Library of Munich, Germany, revised 2011.
  • Handle: RePEc:pra:mprapa:32161
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    References listed on IDEAS

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    Cited by:

    1. Heski Bar-Isaac & Guillermo Caruana & Vicente Cunat, 2012. "Search, Design, and Market Structure," American Economic Review, American Economic Association, vol. 102(2), pages 1140-1160, April.
    2. Arthur Fishman & Nadav Levy, 2015. "Search Costs and Investment in Quality," Journal of Industrial Economics, Wiley Blackwell, vol. 63(4), pages 625-641, December.
    3. Ş. Akın & Brennan Platt, 2014. "A theory of search with deadlines and uncertain recall," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 55(1), pages 101-133, January.
    4. repec:kap:jeczfn:v:121:y:2017:i:2:d:10.1007_s00712-016-0518-0 is not listed on IDEAS
    5. Mariana Cunha & António Osório & Ricardo Ribeiro, 2016. "Endogenous product design and quality with rationally inattentive consumers," Working Papers de Economia (Economics Working Papers) 03, Católica Porto Business School, Universidade Católica Portuguesa.

    More about this item

    Keywords

    product differentiation; product design; search;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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