Vertical product differentiation under demand uncertainty

Yi-Ling Cheng

Economic Modelling, 2014, vol. 36, issue C, 51-57

Abstract: In this paper, I examine a quality-then-price game in a fully covered market where firms are uncertain about consumer tastes regarding quality. The equilibrium is characterized under the fixed costs and variable costs of quality improvement, respectively. It is shown that the uncertainty is a differentiation force, and the quality differentiation increases more under variable costs than under fixed costs. In addition, an increase in uncertainty leads to higher profits and higher social welfare regardless of whether under fixed or variable costs. This result contrasts with the lower welfare in the Hotelling model with uncertainty. Finally, an analysis of the case of partial market coverage with uncertainty completes this paper.

Keywords: Uncertainty; Product quality; Vertical product differentiation (search for similar items in EconPapers)
JEL-codes: L13 L15 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:36:y:2014:i:c:p:51-57

DOI: 10.1016/j.econmod.2013.09.019

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