Vertical Differentiation with Variety-Seeking Customers

29 Pages Posted: 1 Jan 2011 Last revised: 3 Sep 2011

See all articles by Robert Zeithammer

Robert Zeithammer

University of California, Los Angeles (UCLA) - Anderson School of Management

Raphael Thomadsen

Olin School - Washington University in St. Louis

Date Written: August 5, 2011

Abstract

We analyze price and quality competition in a vertically differentiated duopoly in which consumers have a preference for variety. The variety-seeking preferences are a consequence of diminishing marginal utility for repeated consumption experiences of the same product. We find that variety-seeking preferences can either soften or intensify price competition, depending on the range of feasible qualities and the strength of consumer preference for variety. When the range of feasible qualities is small enough, prices are higher than would be obtained in the absence of variety seeking - leading to higher profits - and competing firms choose to minimally differentiate themselves from each other. On the other hand, if qualities are exogenously set to be different enough from each other then stronger preferences for variety are associated with moreintense price competition and lower profits

Keywords: differentiation, variety seeking, competition

JEL Classification: C71, D43

Suggested Citation

Zeithammer, Robert and Thomadsen, Raphael, Vertical Differentiation with Variety-Seeking Customers (August 5, 2011). Available at SSRN: https://ssrn.com/abstract=1688015 or http://dx.doi.org/10.2139/ssrn.1688015

Robert Zeithammer (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Raphael Thomadsen

Olin School - Washington University in St. Louis ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

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