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Quality Uncertainty as Resolution of the Bertrand Paradox
Authors:Attila Tasnádi  Trenton G. Smith  Andrew S. Hanks
Affiliation:1. Corvinus University of Budapest;2. University of Otago;3. Cornell University
Abstract:It is well‐known that product differentiation eliminates the Bertrand paradox (i.e. marginal cost pricing under duopoly). While differentiation is often justified with reference to the consumer's ‘preference for variety’, the conditions under which such a preference is likely to arise are rarely considered. We investigate this question in a setting in which uncertainty about product quality can endogenously generate either convex or non‐convex preferences. We show that even when two goods are ex ante homogeneous, quality uncertainty can eliminate the Bertrand paradox.
Keywords:
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