Competitive Market Segmentation
In a two-firm model where each firm sells a high-quality and a low-quality version of a product, customers differ with respect to their brand preferences and their attitudes towards quality. We show that the standard result of quality-independent markups crucially depends on the assumption that the customers' valuation of quality is identical across firms. Once we relax this assumption, competition across qualities leads to second-degree price discrimination. We find that markups on low-quality products are higher if consuming a low-quality product involves a firm-specific disutility. Likewise, markups on high-quality products are higher if consuming a high-quality product creates a firm-specific surplus.
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- George Deltas & Thanasis Stengos & Eleftherios Zacharias, 2011.
"Product line pricing in a vertically differentiated oligopoly,"
Canadian Journal of Economics,
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- George Deltas & Thanasis Stengos & Eleftherios Zacharias, 2010. "Product Line Pricing in a Vertically Differentiated Oligopoly," Working Paper Series 14_10, The Rimini Centre for Economic Analysis.
- George Deltas & Thanasis Stengos & Eleftherios Zacharias, 2010. "Product Line Pricing in a Vertically Differentiated Oligopoly," Working Papers 1010, University of Guelph, Department of Economics and Finance.
- 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.
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"Nonlinear Pricing with Random Participation,"
Review of Economic Studies,
Wiley Blackwell, vol. 69(1), pages 277-311, January.
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