Vertical Differentiation in Frictional Product Markets

Abstract

We consider a version of the imperfect competition model of Butters (1977), Varian (1980) and Burdett and Judd (1983) in which sellers make an ex-ante investment in the quality of their variety of the product. Equilibrium exists, is unique and is efficient. In equilibrium, search frictions not only cause sellers to offer different surpluses to buyers but also cause sellers to choose different qualities for their varieties. That is, equilibrium involves endogenous vertical differentiation. As search frictions decline, the market becomes more and more unequal as a smaller and smaller fraction of sellers produces varieties of increasing quality, offers increasing surplus to their customers, and captures an increasing share of the market, while a growing fraction of sellers produces varieties of decreasing quality. Gains from trade and welfare grow. Under some conditions, the growth rate of gains from trade and welfare is constant.

Robust sub-Gaussian estimation of a mean vector in nearly linear time

“…This finding has important policy implications. Market concentration has increased in the last decades, which is seen as worrisome by both policy-makers and economists (Akcigit and Ates, 2021;Autor et al, 2020;Decker et al, 2016) A potential explanation is a decrease in search frictions, with the advent of digital platforms among others (Albrecht et al, 2022;Bai et al, 2020;Lenoir et al, 2022;Mazet-Sonilhac, 2021). Our findings challenge and nuance this theory:…”

“…In particular we ask if modelling meeting rates as constant matches the data. If so, then frictions always have an homogenizing effect and a decrease in friction intensity causes a concentration of the market as stated in Bai et al (2020); Albrecht et al (2022); Lenoir et al (2022); Mazet-Sonilhac (2021). If not, then this needs not be the case.…”

“…On the other hand, the rise in concentration might be due to an increase in market competition, which enables the most-efficient firms to grow faster: in this case, market concentration is good news (Autor et al, 2020). For instance, the recent decrease in search frictions, with the advent of digital platforms among others, has been advanced as one explanation for increased market competition and thus increased market concentration (Albrecht et al, 2022;Bai et al, 2020). The common view is that by preventing agents from being matched with the most-efficient firm immediately, search frictions allow the least-efficient firms to survive and thus decrease both market concentration and market competition (Eaton et al, 2019;Lenoir et al, 2022).…”

“…This increased competition due to a decline of search frictions has also been emphasized on domestic product marketsAlbrecht et al (2022) or credit markets Mazet-Sonilhac (2021).…”

Optimal Product Design: Implications for Competition and Growth Under Declining Search Frictions

“…Without noise, if a mass of firms were to choose , there would be a mass of retailers carrying varieties with breadth . As shown in Albrecht, Menzio, and Vroman (2021), the mass of retailers at would create a discontinuity at in an individual firm's marginal benefit from designing a more specialized variety and there would be no continuous marginal cost that makes choosing optimal for the firm. Without noise, therefore, there could not be no equilibrium in which all firms choose .…”