Linking price dispersion to product differentiation - incorporating aspects of customer involvement

Marcel Cohen

Applied Economics, 1998, vol. 30, issue 6, 829-835

Abstract: The fact that product differentiation can cause price dispersion - price differences between alternative brands of what are seemingly identical products - is not surprising. Our contribution is to establish not whether, but how, it does so. We explore the mechanisms involved using a variant of Hotelling's market line model. We make no explicit assumptions about the functional form of the consumer's utility function so that we derive a general relationship between price dispersion and product differentiation. We then survey 16 product groups to identify the functional form of the consumer's utility function that allows our result to best fit real-world circumstances. We show that it is not product differentiation per se that causes price dispersion but rather the presence of a differential advantage of one product over another. More importantly, we show that the impact of a differential advantage in causing price dispersion is amplified (or attenuated) by an aspect of customer involvement in a purchase. The greater the customer involvement in a purchase the more amplified is the impact of product differentiation on price dispersion but this is sensitive only to logarithmic (roughly, order of magnitude) changes in customer involvement.

Date: 1998
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/000368498325534 (text/html)
Access to full text is restricted to subscribers.

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:taf:applec:v:30:y:1998:i:6:p:829-835

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAEC20

DOI: 10.1080/000368498325534

Access Statistics for this article

Applied Economics is currently edited by Anita Phillips

More articles in Applied Economics from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().