The Influence of a Neighbouring Market on Product Qualities and Prices

Abstract

This paper analyses a model of vertical product differentiation in which there is a primary market with two ®rms and a secondary market with no ®rms. Consumers in the secondary market incur a cost when purchasing the product from the primary market. The ®rms sequentially choose product quality and then simultaneously choose prices. Firm 1 always chooses the maximum quality, while ®rm 2's quality and the prices depend on the cost. Also, the cost determines which ®rm(s), if either, serves the secondary market. It is shown that the ®rms and the consumers of each market prefer different levels of costs.y The author thanks an anonymous referee, Jon Vilasuso, and participants at the 1998 Southeastern Economic Theory Conference for helpful comments and suggestions. The usual disclaimer applies.

Quality, distance and trade: A strategic approach

“…The first investigates trade with quality‐differentiated products (see, e.g., Eaton and Kierzkowski ; Shaked and Sutton ; Flam and Helpman ; Motta et al. ; Cabrales and Motta ; Frascatore ; De Fraja and Norman ; Schott ; Hallak ; Choi et al. ; Sutton ).…”

“…Our paper is also related to two other strands of literature. The first investigates trade with quality-differentiated products (see, e.g., Eaton and Kierzkowski 1984;Shaked and Sutton 1984;Flam and Helpman 1987;Motta et al 1997;Cabrales and Motta 2001;Frascatore 2001;De Fraja and Norman 2004;Schott 2004;Hallak 2006;Choi et al 2006;Sutton 2007). A second stream of literature analyses the optimal trade policy under trade with quality-differentiated products, and includes papers such as Herguera et al (2000Herguera et al ( , 2002, Zhou et al (2002), Boccard and Wauthy (2005) and Saggi and Sara (2008).…”

“…The fact that some demands may be driven down to zero following parameter changes is not new in the literature on vertical differentiation, both with and without trade, see for example Wauthy () and Frascatore ().…”

Quality, Distance and Trade: A Strategic Approach

“…Our paper is also related to two other strands of literature. The first investigates trade with quality-differentiated products (see, e.g., Eaton and Kierzkowski 1984;Shaked and Sutton 1984;Flam and Helpman 1987;Motta et al 1997;Frascatore 2001;Cabrales and Motta 2001;De Fraja and Norman 2004;Schott 2004;Hallak 2006;Choi et al 2006;Sutton 2007). A second stream of literature analyzes the optimal trade policy under trade with quality-differentiated products, and includes papers such as Herguera et al (2000Herguera et al ( , 2002, Zhou et al (2002), Boccard and Wauthy (2005) and Saggi and Sara (2008).…”

“…The fact that some demands may be driven down to zero following parameter changes is not new in the literature on vertical differentiation, both with and without trade, see for exampleWauthy (1996) andFrascatore (2001).…”