Product Lines and Price Discrimination in Markets with Information Frictions

Natalia Fabra and Juan-Pablo Montero ()
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Juan-Pablo Montero: Economics Department, Pontificia Universidad Catolica de Chile, Santiago 7820436, Chile; Instituto Sistemas Complejos de Ingenieria (ISCI), Santiago 8370397, Chile

Management Science, 2022, vol. 68, issue 2, 981-1001

Abstract: A well-known principle in economics is that firms differentiate their product offerings in order to relax competition. However, in this paper we show that information frictions can invalidate this principle. We build a duopolistic competition model of second-degree price discrimination with information frictions in which (i) an equilibrium always exists with overlapping product qualities, whereas (ii) an equilibrium with nonoverlapping product qualities exists only if both information frictions and the cost of providing high quality are sufficiently small. As a consequence, reasons other than an attempt to soften competition should explain why firms in some cases carry nonoverlapping product lines.

Keywords: product strategy; pricing strategy; second-degree price discrimination; search; vertical differentiation; retail competition (search for similar items in EconPapers)
Date: 2022
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http://dx.doi.org/10.1287/mnsc.2020.3941 (application/pdf)

Related works:
Working Paper: Product Lines and Price Discrimination in Markets with Information Frictions (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:68:y:2022:i:2:p:981-1001

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