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PRODUCT FUNCTIONALITY, COMPETITION, AND MULTIPURCHASING
Author(s) -
Anderson Simon P.,
Foros Øystein,
Kind Hans Jarle
Publication year - 2017
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12213
Subject(s) - competition (biology) , product (mathematics) , quality (philosophy) , variety (cybernetics) , microeconomics , economics , set (abstract data type) , ideal (ethics) , industrial organization , business , computer science , mathematics , ecology , philosophy , geometry , epistemology , artificial intelligence , biology , programming language
The more functionalities a good offers, the greater is its perceived quality. Equilibrium prices in standard spatial competition models depend solely on quality differences. We assume that new functionalities are more appreciated the closer a product is to a consumer's ideal variety. Prices are then increasing in functionality levels. Furthermore, we endogenize whether consumers buy only one of two varieties (single‐purchase) or both (multipurchase). Under multipurchase, there might be a hump‐shaped relationship between equilibrium prices and functionality levels. Therefore, it could be optimal for each supplier to sacrifice sales and set prices so high that multipurchase is eliminated.