Vertical Differentiation Through Product Design

Max Riegel ()

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: I study pricing and product design choices of multiproduct firms in a model of directed search. Product design introduces vertical differentiation à la Gabszewicz and Thisse (1979) as well as Shaked and Sutton (1982). While all consumers have a preference for a more niche product design, consumers with lower search costs benefit relatively more. Firms gain from dispersion in tastes through product design and choose maximum differentiation in equilibrium. The firm with the broader product design sets a lower price and attracts consumers with high search costs.

Keywords: product design; vertical differentiation; consumer search; directed search; search cost heterogeneity (search for similar items in EconPapers)
JEL-codes: D43 D83 L15 (search for similar items in EconPapers)
Pages: 32
Date: 2024-06
New Economics Papers: this item is included in nep-bec, nep-com, nep-ind and nep-mic
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