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Product Proliferation and Pricing in a Market with Positional Effects

George Deltas () and Eleftherios Zacharias

No 242312853, Working Papers from Lancaster University Management School, Economics Department

Abstract: We provide an explanation for product versioning that is not driven by differential costs or consumer preference heterogeneity, and investigate its implications. Consumers care whether a product they own is better than that owned by others, and whether others own a better product than them. These positional effects can induce a firm to offer products of different quality, with the high quality product becoming more exclusive as these effects strengthen. Consumers with no positional preferences become worse off when the broader market acquires them, except following the introduction of the second product, when some such consumers become better off. Positional preference also reduce total consumer surplus holding the number of products fixed; however, they increase consumer surplus if they lead the firm to introduce a second product of sufficiently high quality. We discuss empirical implications of the theory.

Keywords: Relative consumption; status effects; positional externalities; Veblen goods (search for similar items in EconPapers)
JEL-codes: L11 D11 D42 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com and nep-mkt
Date: 2018
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