Consumer heterogeneity and strategic quality decisions

Consumer heterogeneity and strategic quality decisions

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Article ID: iaor1997533
Country: United States
Volume: 42
Issue: 2
Start Page Number: 157
End Page Number: 172
Publication Date: Feb 1996
Journal: Management Science
Authors:
Keywords: marketing
Abstract:

Though recent studies show that quality differentiation is an equilibrium outcome, products of similar qualities frequently are observed in the marketplace. This inconsistency may be explained by incorporating consumer heterogeneity along unobservable attributes into a model of competition. In this paper, consumers not only take into account the quality and price of a product but also their heterogeneous tastes along other attributes which are unobservable to firms. The paper investigates the effect of heterogeneity along the unobservable attributes on both quality and price equilibrium in a two-stage game framework. It shows that when consumers are sufficiently heterogeneous along the unobservable attributes, the firms offer products of identical qualities in equilibrium. Under low levels of heterogeneity along the unobservable attributes, however, the present results are consistent with past research which argues for quality differentiation.

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