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Transparency and Product Differentiation with Competing Vertical Hierarchies

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Abstract

We revisit the choice of product differentiation by competing firms in the Hotelling model, under the assumption that firms are vertically separated, and that retailers choose products’ characteristics. We show that retailers with private information about their marginal costs choose to produce less differentiated products than retailers with no private information, in order to increase their information rents. Hence, information asymmetry increases social welfare because it induces firms to sell products that appeal to a larger number of consumers. The socially optimal level of transparency between manufacturers and retailers depends on the weight assigned to consumers’ surplus and trades of two effects: higher transparency reduces price distortion but induces retailers to produce excessively similar products.

Suggested Citation

  • Matteo Bassi & Marco Pagnozzi & Salvatore Piccolo, 2011. "Transparency and Product Differentiation with Competing Vertical Hierarchies," CSEF Working Papers 288, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  • Handle: RePEc:sef:csefwp:288
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    File URL: http://www.csef.it/WP/wp288.pdf
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    Keywords

    product differentiation; vertical relations; transparency; regulation;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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