DP12046 Product Lines and Price Discrimination in Markets with Information Frictions

Author(s): Natalia Fabra, Juan Pablo Montero
Publication Date: May 2017
Date Revised: July 2020
Keyword(s): pricing strategy, product strategy, retail competition, search, second degree price discrimination, vertical differentiation
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12046

A well known principle in economics is that firms differentiate their product offerings in order to relax competition. However, in this paper we show that in-formation frictions can invalidate this principle. We build a duopolistic model of second-degree price competition with information frictions in which (i) there always exists an equilibrium with overlapping qualities, whereas (ii) the equilibrium with non-overlapping qualities exists only when both information frictions and the costs of providing high quality are small enough. As a consequence, reasons other than the attempt to soften competition should be used to explain why firms in some cases carry non-overlapping product lines.