Brand-specific tastes for quality
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Bonatti_Brand-Specific.pdf
Size
443.1 KB
Format
Adobe PDF
Checksum (MD5)
4a6f06018df83cb63446fa6454ea94bc
Author(s)
Bonatti, Alessandro
Date Issued
December 2010
Journal
International Journal of Industrial Organization
Publisher
Elsevier
Citation
Bonatti, Alessandro. “Brand-Specific Tastes for Quality.” International Journal of Industrial Organization 29, no. 5 (September 2011): 562–575.
Version
Author's final manuscript
Abstract
This paper develops a model of nonlinear pricing with competition. The novel element is that each consumer's willingness to pay for quality is private information and is allowed to differ across brands. The consumer's preferences are represented by a multidimensional type containing the marginal value of quality for different products. Buyers with high willingness to pay for quality also display strong preferences for particular brands, and require higher discounts in order to switch away from their favorite product. Therefore, competition is fiercer for buyers with lower tastes for quality, and hence more elastic demands. This is in sharp contrast to earlier models in which competition is fiercer for higher-taste, more valuable buyers. In equilibrium, firms either compete intensively for the entire market (providing strictly positive rents to all consumers) or shut down the least profitable segment of the market. Quality levels are distorted downwards for all buyers, except for those with the highest type. The number of competing firms and the degree of correlation across brand preferences enhance the efficiency of the allocation.
MIT Department
Sloan School of Management
Terms of Use
Creative Commons Attribution-Noncommercial-NoDerivatives
Persistent DSpace Link
DOI of Published Version
https://doi.org/10.1016/j.ijindorg.2010.11.008
