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Lecture 8

Lecture 8

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Published by Tom Holden

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Published by: Tom Holden on Nov 29, 2012
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10/17/2013

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Lecture 8: Vertical differentiation and advertisingTom Holdenio.tholden.org
 
Material left from last week
TheShaked and Sutton (1982)quality-choice model.
Empirical work on product differentiation.
Market power without product differentiation.
Why does advertising work? Three views:
Persuasive.
Informative.
Complementary
More on advertising: (Unlikely to finish today)
Models.
Welfare.
Empirics.
Additional reference for the advertising material:Bagwell
 
Under vertical differentiation, rather than producing differentproducts, firms produce different
qualities 
of the same product.
Suppose there are two firms.
Firm
1
produces goods of quality
and charges a price
and firm
2
 produces goods of quality
and charges a price
. Assume
<
(sofirm
1
is low quality).
They both have zero marginal cost.
There is a unit mass of consumers, indexed by
0,1
.
Consumer
gets surplus of 
from consuming a good of quality
 and paying price
, where
(large) is their underlying valuation of thegood.
Consumers with low
 
are happy to buy “Tesco Value”.
 
Consumers with high
 
are prepared to pay extra to get “Sainsbury’s Tastethe Difference”.
 
All consumers would buy from Sainsbury’s if Sainsbury’s was the same
price as Tesco however. (This is what makes it vertical differentiation.)

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