Working Paper: NBER ID: w10594
Authors: Dennis W. Carlton; James D. Dana Jr.
Abstract: We show that demand uncertainty leads to vertical product differentiation even when consumers are homogeneous. When a firm anticipates that its inventory or capacity may not be fully utilized, product variety can reduce its expected costs of excess capacity. When the firm offers a continuum of product varieties, the highest quality product has the highest profit margins but the lowest percentage margin, while the lowest quality product has the highest percentage margin but the lowest absolute margin. We derive these results in both a monopoly model and a variety of different competitive models. We conclude with a discussion of empirical predictions together with a brief discussion of supporting evidence available from marketing studies.
Keywords: No keywords provided
JEL Codes: D4; D8; L0; L1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| D (Y10) | A (Y60) |
| E (Y60) | B (Y20) |
| A (Y60) | B (Y20) |
| B (Y20) | C (Y60) |
| A (Y60) | C (Y60) |