Product Differentiation by Competing Vertical Hierarchies
Author(s) -
Bassi Matteo,
Pagnozzi Marco,
Piccolo Salvatore
Publication year - 2015
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/jems.12115
Subject(s) - product differentiation , information asymmetry , microeconomics , transparency (behavior) , economic rent , order (exchange) , private information retrieval , business , distortion (music) , economic surplus , product (mathematics) , economics , welfare , industrial organization , mathematics , telecommunications , computer science , cournot competition , market economy , amplifier , statistics , geometry , finance , bandwidth (computing) , computer security
We revisit the choice of product differentiation in the Hotelling model, by assuming that competing firms are vertically separated, and that retailers choose products' characteristics. The “principle of differentiation” does not hold because retailers with private information about their marginal costs produce less differentiated products in order to increase their information rents. Hence, information asymmetry within vertical hierarchies may increase social welfare by inducing them to sell products that appeal to a larger number of consumers. We show that the socially optimal level of transparency between manufacturers and retailers depends on the weight assigned to consumers' surplus and trades off two effects: higher transparency reduces price distortion but induces retailers to produce excessively similar products.