Scandinavian Working Papers in Economics

Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science

No 2012/9: Product quality, competition, and multi-purchasing

Simon P. Anderson (), Øystein Foros () and Hans Jarle Kind ()
Additional contact information
Simon P. Anderson: Dept. of Economics, University of Virginia, Postal: University of Virginia, PO Box 400182, Department of Economics, Monroe Hall, Charlottesville, VA 22904-4182, USA,
Øystein Foros: Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway
Hans Jarle Kind: Dept. of Economics, Norwegian School of Economics, Postal: NHH , Department of Economics, Helleveien 30, N-5045 Bergen, Norway

Abstract: In a Hotelling duopoly model, we introduce quality that is more appreciated by closer consumers. Then higher common quality raises equilibrium prices, in contrast to the standard neutrality result. Furthermore, we allow consumers to buy one out of two goods (single-purchase) or both (multi-purchase). Prices are strategically independent when some consumers multi-purchase because suppliers price the incremental benefit to marginal consumers. In a multi-purchase regime, there is a hump-shaped relationship between equilibrium prices and quality when quality functions overlap. If quality is sufficiently good, it might be a dominant strategy for each supplier to price high and eliminate multi-purchase.

Keywords: Hotelling model with quality; multi-purchase; incremental pricing; content competition

JEL-codes: D00; D40

37 pages, August 28, 2012

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