Quality Matters: Monopolistic Competition with Heterogeneous Consumers

Цена качества: монополистическая конкуренция с неоднородными потребителями

Verbus, Valery (Вербус, Валерий) () and Alexander Osharin
Additional contact information
Verbus, Valery (Вербус, Валерий): National Research University Higher School of Economics; Institute for Physics of Microstructures of the Russian Academy of Sciences

Ekonomicheskaya Politika / Economic Policy, 2019, vol. 3, 152-175

Abstract: The paper builds a two-sector monopolistic competition model featuring multi- product firms and heterogeneous consumers endowed with a Cobb–Douglas utility nesting a generalized CES function. In contrast to the standard CES, the generalized CES function includes both the love of variety and the love for product quality, which makes it possible to distinguish consumers differing in their product quality perception. The industrial sector encompasses firms producing differentiated products of varied quality, targeting a certain type of consumer. In such a case, firms set the price and quality for a particular product so as to maximize their profits, while consumers find the optimum price-quality combination, which may be different for groups of consumers having different preferences. The model allows one to derive the demand functions of heterogeneous consumers for goods of different quality and makes it possible to analyze different strategies of firms in their choice of the optimal price-quality ratio for their products. It also allows the formulation of conditions for screening in the case of incomplete information about the type of consumers. The main difference between the equations for screening in the model of monopolistic competition and the standard screening models in theory of contracts lies in the absence of individual rationality restrictions in the monopolistically competitive setting, where only the incentive compatibility is taken into account for both groups of consumers. As a result, in the absence of additional restrictions on the part of the regulatory authorities, the screening procedure in the monopolistic competition setting leads to a decrease in welfare for less affluent consumers.

Keywords: heterogeneous consumers; monopolistic competition; CES utility function; quality of goods. (search for similar items in EconPapers)
JEL-codes: D11 D21 D43 L11 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://repec.ranepa.ru/rnp/ecopol/ep1923.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rnp:ecopol:ep1923

Access Statistics for this article

Ekonomicheskaya Politika / Economic Policy is currently edited by Vladimir Mau

More articles in Ekonomicheskaya Politika / Economic Policy from Russian Presidential Academy of National Economy and Public Administration Contact information at EDIRC.
Bibliographic data for series maintained by RANEPA maintainer ().