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Deterministic versus Random Utility: Implied Patterns of Vertical Product Differentiation in a Multi-Product Monopoly

Christiaan Behrens, Mark Lijesen, Eric Pels and Erik Verhoef ()
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Christiaan Behrens: VU University Amsterdam
Mark Lijesen: VU University Amsterdam
Eric Pels: VU University Amsterdam

No 12-023/3, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: In this article we study patterns of vertical product differentiation in a multi-product monopoly using a random utility model. Prior research shows that applying such a model in a multi-product setting implies symmetric patterns of product differentiation in which all product variants of a single firm have the same characteristics. Assuming that preferences differ across consumers and allowing for unobserved demand heterogeneity, we numerically show the existence of asymmetric, fully differentiated, patterns of vertical product differentiation in which the monopolist maximises profits by setting prices and qualities. In particular, we show that the patterns of vertical product differentiation depend crucially on the level of unobserved demand heterogeneity and the observed dispersion of willingness to pay for quality. Only if unobserved demand heterogeneity is small relative to the observed dispersion, asymmetric, fully differentiated, equilibriums exist. Furthermore, we find in our model that the level of unobserved heterogeneity and the dispersion of willingness to pay for quality do not affect the relative welfare efficiency of the monopolist.

Keywords: Vertical product differentiation; market segmentation; multi-product monopoly; random utility models (search for similar items in EconPapers)
JEL-codes: D21 D42 L11 L12 (search for similar items in EconPapers)
Date: 2012-03-13
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20120023

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