Consumer Heterogeneity and Strategic Quality Decisions

Byong-Duk Rhee
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Byong-Duk Rhee: John M. Olin School of Business, Washington University, St. Louis, Missouri 63130

Management Science, 1996, vol. 42, issue 2, 157-172

Abstract: Though recent studies show that quality differentiation is an equilibrium outcome, products of similar qualities frequently are observed in the marketplace. This inconsistency may be explained by incorporating consumer heterogeneity along unobservable attributes into a model of competition. In this paper, consumers not only take into account the quality and price of a product but also their heterogeneous tastes along other attributes which are unobservable to firms. We investigate the effect of heterogeneity along the unobservable attributes on both quality and price equilibrium in a two-stage game framework. We show that when consumers are sufficiently heterogeneous along the unobservable attributes, the firms offer products of identical qualities in equilibrium. Under low levels of heterogeneity along the unobservable attributes, however, our results are consistent with past research which argues for quality differentiation.

Keywords: consumer heterogeneity; quality; unobservable attributes; logit; two-stage game; quality differentiation; unique versus identical qualities (search for similar items in EconPapers)
Date: 1996
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Citations: View citations in EconPapers (22)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:42:y:1996:i:2:p:157-172

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