Transparency and Product Differentiation with Competing Vertical Hierarchies

We revisit the choice of product differentiation by competing firms in the Hotelling model, by assuming that firms are vertically separated, and that retailers choose products' characteristics. We show that retailers with private information about their marginal costs produce less differentiated products than manufacturers or retailers with no private information, in order to increase their information rents. Hence, information asymmetry within firms may increase social welfare by inducing them to sell products that appeal to a larger number of consumers. 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.