Price Competition in a Duopoly Characterized by Positional Effects

Abstract

We examine the price decisions in a vertically differentiated duopoly where the decision to buy a good depends not only upon the intrinsic utility from consuming it but also upon the social attributes (prestige, uniqueness etc) associated with its consumption. These social attributes are especially important in vertically differentiated markets. We show that when these attributes are not very strong, if their intensity increases, the profits of both firms increase. However, when these attributes are very important, if their intensity increases, the profits of the firm that offers a lower quality variant increase whereas the profits of the firm that offers the higher quality variant decrease. Our results have implications on the amount of persuasive advertising firms should conduct in such markets.

Keywords: Vertical differentiation, positional externalities, snob effect, bandwagon effect

JEL Classification: L11, D11, D43