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Title:Vertical product differentiation when quality is unobservable to buyers PDF Logo
Authors:Orosel, Gerhard O.
Zauner, Klaus G.
Issue Date:2004
Series/Report no.:CESifo working papers 1271
Abstract:We analyze vertical product differentiation in a model where a good?s quality is unobservable to buyers before purchase, a continuum of quality levels is technologically feasible, and minimum quality is supplied under competitive conditions. After purchase the true quality of the good is revealed with positive probability. To provide firms with incentives to actually deliver promised quality, prices must exceed marginal cost. We derive sufficient conditions for these incentive constraints to determine equilibrium prices, and show that under certain conditions only one or both of the extreme levels of quality, minimum and maximum quality, are available in the market.
Subjects:experience goods
product differentiation
product quality
asymmetric information
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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