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We endogenize product differentiation in a model of sequential search with random firm-consumer match value à la Wolinsky 1986 and Anderson and Renault 1999. We focus on a product design choice by which a firm can control the dispersion of consumer valuations for its product; we interpret low dispersion products as ‘generic’ and high dispersion products as ‘nichy.’ Equilibrium product design depends on a feedback loop: when reservation utility is high low, the marginal customer’s match improves worsens with more nichy products, encouraging high low differentiation by firms. In turn, when firms offer more nichy products, this induces more intense search; depending on search costs, this could raise or lower consumers’ reservation utility. Remarkably, when the match distribution satisfies a hazard rate condition, firm and consumer interests align: equilibrium product design always adjusts to the level that maximizes utility. When this condition is not met, either multiple equilibria one nichy, the other generic or one asymmetric equilibrium generic and nichy firms coexist can arise; we argue that the former is more likely for common specifications of consumer preferences.

Item Type: MPRA Paper -

Original Title: Niche products, generic products, and consumer search-

Language: English-

Keywords: product differentiation; product design; search-

Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search ; Learning ; Information and Knowledge ; Communication ; Belief ; UnawarenessD - Microeconomics > D4 - Market Structure, Pricing, and Design > D43 - Oligopoly and Other Forms of Market ImperfectionL - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L15 - Information and Product Quality ; Standardization and Compatibility-

Autor: Larson, Nathan


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