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Signals Sell: Product Lines when Consumers Differ Both in Taste for Quality and Image Concern

Jana Friedrichsen ()

No 70, Rationality and Competition Discussion Paper Series from CRC TRR 190 Rationality and Competition

Abstract: This paper analyzes optimal product lines when consumers differ both in their taste for quality and in their desire for social image. The market outcome features partial pooling and product differentiation that is not driven by heterogeneous valuations for quality but by image concerns. A typical monopoly outcome is a two-tier product line resembling a \"masstige\" strategy as observed in luxury goods markets. Products can have identical quality and differ only in price and image, thereby rationalizing quality-equivalent line extensions. Under competition, both average quality and market coverage are (weakly) higher but monopoly can yield higher welfare than competition.

Keywords: image concern; conspicuous consumption; two-dimensional screening; nonlinear pricing (search for similar items in EconPapers)
JEL-codes: L12 L15 D11 D21 D82 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-ind, nep-mic and nep-mkt
Date: 2018-02-08
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