Quality differentiation and firms’ choices between online and physical markets

Yijuan Chen, Xiangting Hu and Sanxi Li

International Journal of Industrial Organization, 2017, vol. 52, issue C, 96-132

Abstract: We study firms’ choices between online and physical markets with respect to product quality and competition, and examine consequences of transparency policies on price competition and market structure. We investigate two contrasting forces. First, since consumers cannot fully inspect an online product’s quality prior to purchase, conventional wisdom and some of the literature suggest that this attracts low-quality products to the online market (a pooling effect). On the other hand, the literature on vertical product differentiation indicates that a firm with a lower-quality product may prefer to reveal its product quality in the physical market because quality differentiation helps alleviate price competition (a differentiation effect). We show that an entrant firm with product quality lower than that of the offline incumbent may choose the physical market, whereas the entrant with a quality higher than the incumbent’s may sell online. More generally the two contrasting forces can give rise to a wide range of product quality—from low-end to high-end—in both markets.

Keywords: Online vs. offline competition; Market choices with respect to quality and competition (search for similar items in EconPapers)
JEL-codes: L13 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:indorg:v:52:y:2017:i:c:p:96-132

DOI: 10.1016/j.ijindorg.2017.01.003

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