Vertical product differentiation, prominence, and costly search

Roberto Rozzi and Stefanie Y. Schmitt

No 190, BERG Working Paper Series from Bamberg University, Bamberg Economic Research Group

Abstract: In many markets, firms offering low-quality goods are more prominent than firms offering high-quality goods. Then, consumers are perfectly informed about the good of the prominent low-quality firm but incur search costs to bring the high-quality good of a competitor to mind. We analyze under which circumstances the less-prominent firm has an incentive to invest in high quality. We investigate two scenarios: (i) homogeneous and (ii) heterogeneous search costs. If search costs are homogeneous, the less-prominent firm produces highquality goods for sufficiently low search costs, and an increase in search costs reduces the range of values for which the less-prominent firm invests in high quality. In contrast, if search costs are heterogeneous, the less-prominent firm produces high-quality goods for sufficiently high search cost heterogeneity, and an increase in average search costs expands the range of values for which the less-prominent firm invests in high quality.

Keywords: consideration sets; duopoly; prominence; search costs; vertical product differentiation (search for similar items in EconPapers)
JEL-codes: D43 D83 L13 (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-bec, nep-com, nep-ind and nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bamber:283000

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