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Essays on Vertically Differentiated Markets for Complementary Goods
Burlakov, Georgi ; Žigić, Krešimir (advisor) ; Giannakas, Konstantinos (referee) ; Kováč, Eugen (referee)
The purpose of this thesis is to shed light on how product complementarity affects the variety of possible equilibrium outcomes in a vertically differentiated market. Complementarity is not uncommon. Many vertically differentiated goods have value for the consumer as complements, that is only if they are used in combination with other goods which can also be of different qualities (e.g. piano with tuning service, business trip with hotel accommodation, computing platform with web browsing application, etc.). Complementarity between goods brings an exogenous expense that the consumer must pay on top of the price of any of the goods available in a vertically differentiated market. However, firms are only partially able to compensate consumers for the exogenous expense by charging lower prices. Some might also be prompted to increase the qualities of their goods. Then, however, the general validity of the maximum-differentiation choice cannot be taken for granted as in the classical no-complementarity case. How many firms will have positive market shares and whether they will serve all consumers at equilibrium cannot be decided based only on the distribution of the consumer identification characteristic~(income or taste). By taking this into account, this thesis reveals a set of possible equilibrium...
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Why mixed qualities may not survive at equilibrium: the case of vertical product differentiation
Burlakov, Georgi
In the classical literature on vertical differentiation, goods are assumed to be single products each offered by a different firm and consumed separately one from another. This paper departs from the standard setup and explores the price competition in a vertically differentiated market where a firm’s product is consumed not separately but in fixed one-to-one ratio with another complementary type of good supplied by a different producer. An optimal solution for market setting with two entrants of a type is proposed, to show that there could be an equilibrium at which the socalled ”mixed-quality combinations”, consisting of one high-quality good and one lowquality good each, remain unsold. For such an equilibrium to exist, it is sufficient the mixed-quality combinations to be at least as differentiated from the best as from the worst combination which retains its positive market share. Thus, the mixed-quality exclusionary outcome appears as a further form in which the well-known maximumdifferentiation principle could be implemented in a multi-market setting. It provides a new explanation of the self selection bias in consumption observed in some industries for complementary goods.
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