Quality differentiation and entry choice between online and offline markets

Yijuan Chen, Xiangting Hu () and Sanxi Li ()

ANU Working Papers in Economics and Econometrics from Australian National University, College of Business and Economics, School of Economics

Abstract: We study a model where an entrant chooses between online and offline markets to compete with an offline-market incumbent. When consumers buy a product from the online market, they cannot inspect the product's quality prior to purchase. Conventional wisdom and some literature suggest that this feature drives low-quality products to hide themselves in the online market. However, the literature on vertical product differentiation indicates that a firm may prefer to reveal its product quality in the offline market, because quality differentiation helps alleviate price competition. We show that under fairly general conditions the entrant will choose the offline market for not only the highest qualities but also the lowest ones, and choose the online market for intermediate qualities. While the average quality of the online good is lower than the incumbent's quality, the actual quality of the online good may be higher than that.

JEL-codes: L13 (search for similar items in EconPapers)
Pages: 10 Pages
Date: 2014-11
New Economics Papers: this item is included in nep-com, nep-cta, nep-ind and nep-mkt
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Persistent link: https://EconPapers.repec.org/RePEc:acb:cbeeco:2014-620

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