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Review of Industrial Organization

Erschienen in:

04.04.2016

If It’s All the Same to You: Blurred Consumer Perception and Market Structure

verfasst von: Edward J. D. Webb

Erschienen in: Review of Industrial Organization | Ausgabe 1/2017

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Abstract

Consumers with bounded perception treat sufficiently similar goods as homogeneous. The effects of bounded perception on a vertically differentiated duopoly with sequential quality choice are examined. When quality entails fixed costs the market becomes more concentrated. When quality entails marginal costs, the second mover may profitably imitate the product of its rival, and the market is either more or less concentrated depending on how bounded perception is. When firms incur entry costs, neither firm may opt to produce when quality entails marginal costs, whereas at least one firm always produces when quality entails fixed costs.

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In fact it is equivalent to a common formulation of the “law”, Δ I/I = K, where I is the intensity of some stimulus, Δ I is the JND and K is a constant. If δ = K−1, this is exactly the formulation employed here.

For a treatment of consumers with a similarity relation for prices in a market, see Bachi (2014).

The first mover is decided by nature, but it could also be that firm 1 is able to move first due to being endowed with some innovation ability that firm 2 lacks. In this case it could be that firm 2’s cost of quality is higher, due to its lack of innovation ability, or lower due to learning from observing firm 1 to be more efficient; but this does not qualitatively affect the results.

The ratio ΔI/I, where I is stimulus intensity and ΔI is the JND is termed the Weber fraction, and is equivalent to δ−1. This has been estimated to be, for example, 0.079 for brightness, 0.048 for loudness and 0.02 for heaviness (Techtsoonian 1971).

Note that such a restriction also applies when quality entails fixed costs; however, it is trivially non-binding.

i.e. its quality solves \(\max _{q_{\ell }}\pi _{\ell }( q_{h}^{BR} ( q_{\ell }) ,q_{1})\).

i.e. its quality solves \(\pi _{h}(q_{h}^{BR}(q_{1}),q_{1}) =\pi _{I}(q_{1})\).

i.e. firm 1’s quality solves \(\pi _{h}(\delta q_{1},q_{1})=\pi _{I}(q_{1})\).

From Eqs. (22) and (24) it is straightforward to show that \(\bar{E}=1/32\) when quality entails fixed costs and \(\bar{E}=2/27\) when quality entails marginal costs.

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Titel: If It’s All the Same to You: Blurred Consumer Perception and Market Structure
verfasst von: Edward J. D. Webb
Publikationsdatum: 04.04.2016
Verlag: Springer US
Erschienen in: Review of Industrial Organization / Ausgabe 1/2017
Print ISSN: 0889-938X
Elektronische ISSN: 1573-7160
DOI: https://doi.org/10.1007/s11151-016-9512-5

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