Transparency and Product Variety

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Abstract

We study the long run e¤ects of transparency in a circular town model of a differentiated market. The market is not fully transparent on the consumer side: A fraction of consumers are uninformed about prices. Increasing transparency reduces the equilibrium price, profit and entry of firms. This improves welfare. If consumers' transportation cost is high, it also improves the average utility of consumers. When transportation costs are very small, the fully transparent market features cut throat competition if there are several firms in the market, and if firms choose pure entry strategies only one firm enters and acts like a monopolist. Consumers therefore prefer that market transparency is as high as possible under the restriction that the market should allow entry for two firms. If firms choose mixed entry strategies, consumers prefer full transparency
Original languageEnglish
PublisherCentre for Industrial Economics, Department of Economics, University of Copenhagen
Number of pages9
Publication statusPublished - 2007

Keywords

  • Faculty of Social Sciences
  • product differentiation
  • competition policy

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