The Influence of a Neighbouring Market on Product Qualities and Prices

Mark R. Frascatore

Australian Economic Papers, 2001, vol. 40, issue 3, 287-306

Abstract: This paper analyses a model of vertical product differentiation in which there is a primary market with two firms and a secondary market with no firms. Consumers in the secondary market incur a cost when purchasing the product from the primary market. The firms sequentially choose product quality and then simultaneously choose prices. Firm 1 always chooses the maximum quality, while firm 2''s quality and the prices depend on the cost. Also, the cost determines which firm(s), if either, serves the secondary market. It is shown that the firms and the consumers of each market prefer different levels of costs.

Date: 2001
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