When Does Variety Increase with Quality?

43 Pages Posted: 21 Aug 2008 Last revised: 20 Mar 2011

See all articles by Suren Basov

Suren Basov

University of Melbourne - Department of Economics

Svetlana Danilkina

Department of Economics, University of Melbourne

David Prentice

Infrastructure Victoria

Date Written: March 19, 2011

Abstract

Casual empiricism suggests higher quality is associated with greater variety. However, recent theoretical and empirical research has either not considered this link, or has been unable to establish unambiguous predictions about the relationship between quality and variety. In this paper we develop a simple model, which predicts that for low qualities variety should be positively correlated with quality and we establish conditions under which variety will either increase or decrease with quality at higher quality levels. The producer uses variety to increase the profitability of price discrimination across different qualities, by increasing the likelihood consumers choose high price products among products yielding the same utility. We show that the number of varieties offered by the monopolist is greater than the social optimum. The predictions of the model are supported by an empirical analysis of the market for cars. A wide range of car manufacturers are found to offer a hump-shaped distribution of varieties.

Keywords: Price discrimination, product variety, bounded rationality, cars

JEL Classification: D4, D8, L11, L15, L62

Suggested Citation

Basov, Suren and Danilkina, Svetlana and Prentice, David, When Does Variety Increase with Quality? (March 19, 2011). Available at SSRN: https://ssrn.com/abstract=1242662 or http://dx.doi.org/10.2139/ssrn.1242662

Suren Basov

University of Melbourne - Department of Economics ( email )

Australia

Svetlana Danilkina

Department of Economics, University of Melbourne ( email )

Department of Economics, Level 4 FBE, building 105
The University of Melbourne, 111 Barry Street
Carlton, VIC 3010
Australia
+61 3 8344 6899 (Fax)

David Prentice (Contact Author)

Infrastructure Victoria ( email )

530 Collins St
Melbourne, 3000
Australia

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