Vertical Differentiation in Frictional Product Markets

James Albrecht, Guido Menzio and Susan Vroman

No 29618, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We consider a version of the imperfect competition model of Butters (1977), Varian (1980) and Burdett and Judd (1983) in which sellers make an ex-ante investment in the quality of their variety of the product. Equilibrium exists, is unique and is efficient. In equilibrium, search frictions not only cause sellers to offer different surpluses to buyers but also cause sellers to choose different qualities for their varieties. That is, equilibrium involves endogenous vertical differentiation. As search frictions decline, the market becomes more and more unequal as a smaller and smaller fraction of sellers produces varieties of increasing quality, offers increasing surplus to their customers, and captures an increasing share of the market, while a growing fraction of sellers produces varieties of decreasing quality. Gains from trade and welfare grow. Under some conditions, the growth rate of gains from trade and welfare is constant.

JEL-codes: D43 D83 L13 O40 (search for similar items in EconPapers)
Date: 2021-12
New Economics Papers: this item is included in nep-com, nep-ind, nep-mic and nep-reg
Note: EFG
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Published as James Albrecht & Guido Menzio & Susan Vroman, 2023. "Vertical Differentiation in Frictional Product Markets," Journal of Political Economy Macroeconomics, vol 1(3), pages 586-632.

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Journal Article: Vertical Differentiation in Frictional Product Markets (2023)
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