Abstract
We have considered a duopoly with perceived vertical differentiation, information disparity and optimistic consumers. When firms compete for informed and uninformed consumers, the former contribute to raise product quality, while equilibrium prices increase with optimistic misperception of the latter, in our first equilibrium. Brand premium includes a quality premium and a misperception rent. In our second equilibrium, informed consumers buy low-quality goods and minimum product differentiation without Bertrand competition occurs. The brand premium is just a misperception rent, however, an increase of the informed consumers share implies price re-balancing and rent reduction. Consumers externalities arise in both equilibria. Firms compete only for informed consumers within our third and fourth equilibrium, as uninformed ones are passive and represent a captive market. Uninformed consumers in one case are overoptimistic, they buy the high quality good and can be cheated in equilibrium. Uninformed consumers approach the real quality differential in the fourth equilibrium, and the model reduces to standard vertical differentiation with perfect information.
Highlights
Brand loyalty is traditionally considered a vehicle of product differentiation (Cabral 2017)
Though brand loyalty may arise for products of superior quality, sold at higher prices justified by quality premia, perceived quality differences in many cases establish a vertical distance between products
We have distinguished perceived from real vertical differentiation, and we have investigated to what extent brand premia are real quality ones, or just misperception rents
Summary
Brand loyalty is traditionally considered a vehicle of product differentiation (Cabral 2017). Be included in the field of behavioral industrial organization (Ellison 2006), where there is general consensus about the assumption of profit maximization for firms that respond strategically to biased consumers’ beliefs Most of these contributions consider the case of price misperception, as highlighted by Heidhues and Kozsegi (2018), quality misperception mainly generates the same effect: consumers overestimate the value of their purchase, and firms make extra-profits. Duopolistic competition with (perceived or real) vertical differentiation is represented as usual with a two-stage game: firms choose the quality level in the first stage, given an exogenous split between informed and uninformed consumers affecting market demand. A growing share of informed consumers represents an incentive for a high-quality firm to raise product quality, as any increase in the expected quality differential does This is exactly the case where the brand premium can be analytically separated into a quality premium and a misperception rent. As for equilibrium analysis, we will consider the case without information disparity, where choice is only affected by optimistic misperception as a benchmark in Sects. 5, 6 will analyze equilibria with information disparity, when most consumers are uninformed, and Sect. 7 will examine equilibria, where firms compete only for informed consumers, while Sect. 8 represents our conclusion
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