Model of Vertical Product Differentiation Based on Triangular Distribution

IntroductionMany researchers1-6]investigated the product dif-ferentiation from the premise that consumer prefer-ences comply with uniform distribution. But thispremise is not completely correct; it obviously neg-lects such a fact that considering consume…

Model of Vertical Product Differentiation Based on Triangular Distribution

Supposing that the consumer preference complies with triangular distribution instead of uniform distribution, we establish the model of vertical product differentiation. The simulation shows that there exists stable equilibrium along with unstable equilibrium. In stable equilibrium, high quality products gain an advantage over low quality products. In unstable equilibrium, the former does not possess an apparent advantage in competition, likely to be at a disadvantage. In order to evolve from unstable equilibrium to stable equilibrium, it is necessary for firms to solve such problems as high prices and consumers' perception of scarcity on product qualities. In general, both product qualities and firm profits increase with the consuming capacity and quality perception, and the latter more rapidly.