Transparency and Product Differentiation with Competing Vertical Hierarchies

Matteo Bassi (), Marco Pagnozzi and Salvatore Piccolo ()
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Matteo Bassi: Università di Salerno and CSEF

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: We revisit the choice of product differentiation by competing firms in the Hotelling model, under the assumption that firms are vertically separated, and that retailers choose products’ characteristics. We show that retailers with private information about their marginal costs choose to produce less differentiated products than retailers with no private information, in order to increase their information rents. Hence, information asymmetry increases social welfare because it induces firms to sell products that appeal to a larger number of consumers. The socially optimal level of transparency between manufacturers and retailers depends on the weight assigned to consumers’ surplus and trades of two effects: higher transparency reduces price distortion but induces retailers to produce excessively similar products.

Keywords: product differentiation; vertical relations; transparency; regulation (search for similar items in EconPapers)
JEL-codes: D43 D82 L13 L51 (search for similar items in EconPapers)
Date: 2011-07-05
New Economics Papers: this item is included in nep-com and nep-cta
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Forthcoming in Journal of Economics and Management Strategy

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Persistent link: https://EconPapers.repec.org/RePEc:sef:csefwp:288

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