Product Differentiation by Competing Vertical Hierarchies

30 Pages Posted: 27 Oct 2015

See all articles by Matteo Bassi

Matteo Bassi

Competition and Markets Authority (CMA)

Marco Pagnozzi

Università di Napoli Federico II; CSEF

Salvatore Piccolo

University of Bergamo, Compass Lexecon and CSEF

Date Written: Winter 2015

Abstract

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.

Suggested Citation

Bassi, Matteo and Pagnozzi, Marco and Piccolo, Salvatore, Product Differentiation by Competing Vertical Hierarchies (Winter 2015). Journal of Economics & Management Strategy, Vol. 24, Issue 4, pp. 904-933, 2015, Available at SSRN: https://ssrn.com/abstract=2680405 or http://dx.doi.org/10.1111/jems.12115

Matteo Bassi (Contact Author)

Competition and Markets Authority (CMA) ( email )

Victoria House
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London, WC1B 4AD
United Kingdom

Marco Pagnozzi

Università di Napoli Federico II ( email )

Department of Economics
Via Cinthia (Monte S. Angelo)
Napoli, 80126
Italy
+39 081 675099 (Phone)
+39 081 7663540 (Fax)

HOME PAGE: http://www.csef.it/people/pagnozzi.htm

CSEF

Italy

Salvatore Piccolo

University of Bergamo, Compass Lexecon and CSEF ( email )

via de caniana 2
24127
Bergamo, BG 24127
Italy

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