Working Paper: CEPR ID: DP16655
Authors: Armin Schmutzler; Stefanie Bossard
Abstract: This paper analyzes decisions of multi-product firms regarding product selection, innovation and advertising as choices of consumer valuation distributions. We show that a profit-maximizing monopolist chooses these distributions so as to maximize the dispersion of the valuation differences between goods across consumers. By contrast, she chooses the willingness-to-pay to be maximally or minimally dispersed, depending on the set of available distributions. In our benchmark model with uniform valuation differences, prices are increasing in valuation difference heterogeneity, but in more general settings this is not necessarily true. Moreover, the relation between willingness-to-pay heterogeneity and prices may well be non-monotone. Over wide parameter ranges, the firm's choice of valuation distribution does not maximize net consumer surplus. This problem is exacerbated when the firm has access to strategies that distort valuation heterogeneity or willingness-to-pay heterogeneity.
Keywords: Product Choice; Multiproduct Firms; Product Heterogeneity; Valuation Distributions; Consumer Confusion
JEL Codes: D43; L13; M30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monopolist's choice of valuation distributions (D39) | Dispersion of consumer valuations (D11) |
| Dispersion of consumer valuations (D11) | Pricing strategies (D49) |
| Pricing strategies (D49) | Consumer welfare (D69) |
| Increasing valuation difference heterogeneity (G19) | Consumer surplus (D11) |
| Increasing valuation difference heterogeneity (G19) | Higher prices (D49) |
| Higher prices (D49) | Decrease in net consumer surplus for some consumers (D11) |
| Choice of valuation distribution (D39) | Net consumer surplus (D11) |
| WTP heterogeneity (C21) | Prices (D49) |