Product differentiation with binding reservation prices

• Autor(a) principal: Pontes, José Pedro
• Data de Publicação: 1993
• Tipo de documento: Artigo
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10400.5/22649
• topic: Product Differentiation; Quality; Transport; Prices; Model

The starting point of our analysis is the model of horizontal and vertical product differentiation due to Launhardt which was presented by Santos Ferreira and Thisse (1992). Two firms, locate in the unit intervat where consumers are distributed, and can select different transport rates which are inverse measures of quality. We study the case where reservation prices are binding, so that the distant consumer may be indifferent between buying one of the goods or an "outside good". This contrasts with the former approach by Santos Ferreira and Thisse (1992) who considered that each consumer must buy one of the two products. In the pure vertical vertical differentiation case, the equilibrium of qualities is found to be robust to this change of assumption: firms maximize quality differentiation. However, the equilibrium of qualities in the case where horizontal and vertical differentiation coexist is sensible to the assumption of binding reservation prices. If the firms choose simultaneously qualities, a multiplicity of equilibria arises. Introducing a "firstmover" advantage, the Stackelberg leader chooses the highest quality and the follower, the minimum one, thus maximizing quality differentiation. Therefore, the possibility of choice of quality by each firm leads always to maximum quality differentiation, even in the case where horizontal and vertical differentiation coexist