HE 12-13 : Vertical Product Differentiation and Airline Classes-Karteikarten | Quizlet

Vertical product differentiation states ?

• Level or degree of superiority

• Quality provision: low quality vs high quality

How to describe and analyse a product ?

• A set of utility-bearing attributes

• For any attribute, we can assess low or high value

• An attribute having a high value is superior to the same attribute having a low value, other things being equal

Parameters of duopoly in vertical product differentiation ?

• 𝐹1 and 𝐹2 compete by choosing quality

• 𝑆-mile-long directed street (𝑆 > 0 )

• 𝑠 measures quality level: 𝑠 = 0, 𝑠 = 1, 𝑠 = 2, ..., 𝑠 = S

How is the supply side ?

• Same product with various quality (one attribute)

• No production constraints

• Same marginal cost: 𝑐1 = 𝑐2 = 𝑐 = 0 (quality independence)

How is the demand side ?

• Consumer preference for quality uniformly distributed

• To what extent a consumer values quality: 𝜃(0 ≤ 𝜃 ≤ 1): value attached to a given quality

• Each consumer has the same willingness to pay: r

• Utility of the consumer: 𝑟 − 𝑝 + 𝜃 ∙ 𝑠

What do firm decisions consist of ?

Quality choice and price choice (s, p)

What price if s1 = s2 ?

regardless of what level, no product differentiation

Firms have no market power: 𝑝1 = 𝑝2 = �

What price if p1 = p2 ?

all consumers will only buy high quality

Firms will only choose high quality, 𝑠1 = 𝑠2 = 𝑆, still no product differentiation

What are the optimal qualities and prices ?

• Determine quality and price at the same time

• Competition

How to identify equilibrium condition ?

Demands and profits at equilibrium ?

How to find the maximum profit for F1 and F2 ?

Set the marginal profit to 0

What are therefore the optimal prices ?

When do you maximise profit ? Equilibrium ?

When S2 - S1 is maxed

Where is the marginal consumer ?

at (S;0) or (0;S) monopolist