Product Differentiation with Multiple Qualities
Quaderni - Working Paper DSE N° 1075
45 Pages Posted: 3 Sep 2016
Date Written: August 30, 2016
We study subgame-perfect equilibria of the classical quality-price, multistage game of vertical product differentiation. Each firm can choose the levels of an arbitrary number of qualities. Consumers’ valuations are drawn from independent and general distributions. The unit cost of production is increasing and convex in qualities. We characterize equilibrium prices, and the equilibrium effects of qualities on the rival’s price in the general model. We present necessary and sufficient conditions for equilibrium differentiation in any of the qualities.
Keywords: multidimensional product differentiation, quality and price competition
JEL Classification: D43, L13
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