Quality differentiation and firms’ choices between online and physical markets
Date
2017-05
Authors
Chen, Yijuan
Hu, Xiangting
Li, Sanxi
Journal Title
Journal ISSN
Volume Title
Publisher
Elsevier
Abstract
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 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.
Description
Keywords
online, market choices, quality, competition, offline
Citation
Collections
Source
International Journal of Industrial Organization
Type
Journal article
Book Title
Entity type
Access Statement
Open Access
License Rights
DOI
10.1016/j.ijindorg.2017.01.003
Restricted until
2037-12-31