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Quality differentiation and firms’ choices between online and physical markets

Chen, Yijuan; Hu, Xiangting; Li, Sanxi

Description

We study firms’ choices between online and physical markets with respect to product quality and competition, and exam- ine consequences of transparency policies on price competition and market structure. We investigate two contrasting forces. First, since consumers cannot fully inspect an online prod- uct’s quality prior to purchase, conventional wisdom and some of the literature suggest that this attracts low-quality prod- ucts to the online market (a p o oling effect). On the other hand, the...[Show more]

dc.contributor.authorChen, Yijuan
dc.contributor.authorHu, Xiangting
dc.contributor.authorLi, Sanxi
dc.date.accessioned2017-04-05T04:49:41Z
dc.identifier.issn0167-7187
dc.identifier.urihttp://hdl.handle.net/1885/114500
dc.description.abstractWe study firms’ choices between online and physical markets with respect to product quality and competition, and exam- ine consequences of transparency policies on price competition and market structure. We investigate two contrasting forces. First, since consumers cannot fully inspect an online prod- uct’s quality prior to purchase, conventional wisdom and some of the literature suggest that this attracts low-quality prod- ucts to the online market (a p o oling effect). On the other hand, the literature on vertical product differentiation indi- cates that a firm with a lower-quality product may prefer to reveal its product quality in the physical market because qual- ity differentiation helps alleviate price competition (a differ- entiation effect). We show that an entrant firm with product quality lower than that of the offline incumbent may choose the physical market, whereas the entrant with a quality higher than the incumbent’s may sell online. More generally the two contrasting forces can give rise to a wide range of product quality—from low-end to high-end—in both markets.
dc.format37 pages
dc.format.mimetypeapplication/pdf
dc.publisherElsevier
dc.rights© 2017 Elsevier B.V.
dc.sourceInternational Journal of Industrial Organization
dc.subjectonline
dc.subjectmarket choices
dc.subjectquality
dc.subjectcompetition
dc.subjectoffline
dc.titleQuality differentiation and firms’ choices between online and physical markets
dc.typeJournal article
local.identifier.citationvolume52
dcterms.dateAccepted2017-01-05
dc.date.issued2017-05
local.publisher.urlhttps://www.elsevier.com/
local.type.statusPublished Version
local.contributor.affiliationChen, Yijuan, Research School of Economics (RSEcon), College of Business and Economics, The Australian National University
local.description.embargo2037-12-31
local.identifier.essn1873-7986
local.bibliographicCitation.startpage96
local.bibliographicCitation.lastpage132
local.identifier.doi10.1016/j.ijindorg.2017.01.003
dcterms.accessRightsOpen Access
CollectionsANU Research Publications

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