Competitive Market Segmentation

Silvio Sticher

Diskussionsschriften from Universitaet Bern, Departement Volkswirtschaft

Abstract: In a two-firm model where each firm sells a high-quality and a low-quality version of a product, customers differ with respect to their brand preferences and their attitudes towards quality. We show that the standard result of quality-independent markups crucially depends on the assumption that the customers' valuation of quality is identical across firms. Once we relax this assumption, competition across qualities leads to second-degree price discrimination. We find that markups on low-quality products are higher if consuming a low-quality product involves a firm-specific disutility. Likewise, markups on high-quality products are higher if consuming a high-quality product creates a firm-specific surplus.

Keywords: price differentiation; vertical competition (search for similar items in EconPapers)
JEL-codes: D43 L13 L15 (search for similar items in EconPapers)
Date: 2013-12
New Economics Papers: this item is included in nep-bec, nep-com, nep-cse, nep-ind, nep-mic, nep-mkt and nep-tid
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Persistent link: https://EconPapers.repec.org/RePEc:ube:dpvwib:dp1313

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