Quality Uncertainty Mitigates Product Differentiation

Helmut Bester

RAND Journal of Economics, 1998, vol. 29, issue 4, 828-844

Abstract: I present the idea that imperfect information about the (vertical) quality characteristics of goods reduces the sellers' incentives for horizontal product differentiation. As a result, the equilibrium outcome may be characterized by "minimum differentiation." In a spatial framework this implies that firms tend to choose head-on competition by agglomerating at the same location. It may happen that consumers benefit from imperfect information about product quality.

Date: 1998
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