Vertical Differentiation With Optimistic Misperceptions And Information Disparities

Alberto Cavaliere and Giovanni Crea ()
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Giovanni Crea: Department of Economics and Management, University of Pavia

No 137, DEM Working Papers Series from University of Pavia, Department of Economics and Management

Abstract: We consider vertical differentiation with quality uncertainty and information disparities, in a duopoly where products have credence attributes and a minimum quality standard exists. Optimistic misperceptions further relax price competition but uninformed consumers may be cheated in equilibrium due to minimum product differentiation when informed consumers buy low quality goods. Optimistic misperceptions turn out to be an incentive for product differentiation when informed consumers buy high quality goods, even if the real quality differentiual is always lower than expected by uninformed consumers. Increasing the share of informed consumers may counterbalance the effect of optimism on equilibrium prices but in the meantime reduce the incentives for product differentiation.

Keywords: asymmetric information; brand premium; quality uncertainty (search for similar items in EconPapers)
JEL-codes: D82 L13 L15 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2017-05
New Economics Papers: this item is included in nep-com, nep-mic and nep-mkt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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