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 since 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.

Product Differentiation by Competing Vertical Hierarchies / Bassi, Matteo; Pagnozzi, Marco; Piccolo, Salvatore. - In: JOURNAL OF ECONOMICS & MANAGEMENT STRATEGY. - ISSN 1058-6407. - 24:(2015), pp. 904-933. [10.1111/jems.12115]

Product Differentiation by Competing Vertical Hierarchies

PAGNOZZI, MARCO;
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 since 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.
2015
Product Differentiation by Competing Vertical Hierarchies / Bassi, Matteo; Pagnozzi, Marco; Piccolo, Salvatore. - In: JOURNAL OF ECONOMICS & MANAGEMENT STRATEGY. - ISSN 1058-6407. - 24:(2015), pp. 904-933. [10.1111/jems.12115]
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11588/577943
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