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Product Differentiation and Price Competition Between a Safe and a Risky Seller

Univ. of Bern Dept. of Economics Disc. Paper No. 98-07

24 Pages Posted: 28 Jan 1999  

Winand Emons

University of Bern - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: October 1998

Abstract

We consider a market served by a safe and a risky seller. While the expensive safe seller can solve the problems of all consumers, the cheap risky seller can help a consumer only with a certain probability. The risky seller's success probabilities are distributed across consumers, and by the choice of her quality the risky seller determines the shape of this distribution. If the risky seller fails, a consumer ends up with the safe seller, paying for the service twice. We study the price-quality competition between the two providers. We show that the principle of maximum product differentiation does not hold in our model, i.e., the risky seller does not choose the minimum quality level in order to relax price competition.

JEL Classification: D43, L13, L15

Suggested Citation

Emons, Winand, Product Differentiation and Price Competition Between a Safe and a Risky Seller (October 1998). Univ. of Bern Dept. of Economics Disc. Paper No. 98-07. Available at SSRN: https://ssrn.com/abstract=138508 or http://dx.doi.org/10.2139/ssrn.138508

Winand Emons (Contact Author)

University of Bern - Department of Economics ( email )

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HOME PAGE: http://staff.vwi.unibe.ch/emons

Centre for Economic Policy Research (CEPR)

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