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Price Competition when Product Quality is Uncertain*

Published online by Cambridge University Press:  17 August 2016

Isabel Grilo  and
Xavier Wauthy
Isabel Grilo
Affiliation:
CORE, Université Catholique de Louvain and Gremars, Université Lille III
Xavier Wauthy
Affiliation:
CEREC, facultés universitaires Saint-louis, Bruxelles and CORE, Université Catholique de Louvain.
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Summary

We consider a market where consumers differ in risk aversion. Two firms sell products of uncertain quality. We characterize the Nash equilibrium in prices and show that, due to consumers’ heterogeneity, less reliable products are likely to coexist with more reliable ones in equilibrium. Moreover, choosing to increase the risk component is in some cases an equilibrium strategy.

Résumé

Résumé

Cet article analyse un marché dans lequel les consommateurs, différant dans leur degré d’aversion au risque, sont susceptibles d’acheter des produits dont la qualité est incertaine. Nous analysons la concurrence en prix dans le cas où deux firmes vendent des produits de fiabilité différente. L’hétérogénéité des consommateurs permet la coexistence à l’équilibre du marché du produit de fiabilité réduite (par exemple un produit d’occasion) et du produit moins risqué. Par ailleurs, nous montrons que le fait de choisir un degré de fiabilité réduit peut correspondre à une stratégie d’équilibre parfait en sous-jeu.

Keywords

L13L13
Type
Research Article
Information
Recherches Économiques de Louvain/ Louvain Economic Review , Volume 66 , Issue 4 , 2000 , pp. 415 - 438
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 2000 

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Footnotes

*

We are grateful to two anonymous referees for useful suggestions. Any remaining errors are own.

References

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