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Quantitative Marketing and Economics

, Volume 6, Issue 1, pp 1–16 | Cite as

Competitive product lines with quality constraints

  • Udo Schmidt-Mohr
  • J. Miguel Villas-BoasEmail author
Article

Abstract

Competing firms often use product lines to screen different types of customers. Examples include, in general markets, product lines that screen the purchasing ability or preference for quality; in credit markets, product lines that screen the risk of the projects with different collateral; in insurance markets, product lines that screen the risk of accident with different coverage; and in labor markets, wage schedules that screen the employees’ abilities with different education levels. In some of these markets there can be some natural quality constraints: a maximum available quality in general markets, no negative collateral in credit markets; coverage not above 100% in insurance markets; minimum education level in labor markets. We present sufficient conditions for the existence of a pure strategies equilibrium (in such markets) under differentiation and a continuous distribution of customer types. We show that the equilibrium exists if there is a sufficiently high degree of differentiation among firms. Furthermore, we show that this equilibrium involves, under certain general conditions, pooling of customer types at the top and at the bottom of the distribution of customer types. The middle types may still be screened by the firms.

Keywords

Product lines Competition Price discrimination 

JEL Classifications

D82 L13 L15 

Notes

Acknowledgements

We would like to thank Joe Farrell, Bettina Mohr, Debu Purohit, Duncan Simester, the Editor, and two anonymous reviewers for helpful comments on an earlier version of this paper. The usual disclaimer applies. Villas- Boas is grateful for support from the Committee on Research, University of California, and the Instituto de Formação Bancária.

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Copyright information

© Springer Science+Business Media, LLC 2007

Authors and Affiliations

  1. 1.Deka Investment Management GmbHFrankfurt am MainGermany
  2. 2.Haas School of BusinessUniversity of CaliforniaBerkeleyUSA

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