Price and variety in the Salop model

Abstract

AbstractUsing a Salop circle model, this research analyzes the welfare implications of firm/product entry with information provision by consumers. While firms use consumer information to target sales efforts, consumers face privacy trade‐offs when providing their personal information. We show that (i) price and profit first increase, then decrease with more varieties; (ii) consumer welfare, affected by price, sales effort, privacy loss, and matching effects, first decreases, then increases with firm entry; (iii) equilibrium information is socially optimal given the number of varieties; and (iv) if the variable cost of providing sales assistance is low (high), free entry leads to too much (few) varieties and too little (more) information, from a social welfare standpoint.