Vertical Differentiation with Variety-Seeking Consumers

We analyze price and quality competition in a vertically differentiated duopoly in which consumers have a preference for variety. The preference for variety is a consequence of diminishing marginal utility for repeated experiences with the same product. We find consumer variety seeking can either soften or intensify price competition, depending on the difference in firm qualities and the strength of consumer preference for variety When the qualities are similar (or the consumer preference for variety is strong), prices and profits are higher than would be obtained in the absence of variety seeking. On the other hand, if qualities differ enough (or the preference for variety is weak), stronger preferences for variety are associated with more intense price competition and lower profits. When firms set their qualities before competing on price and the range of feasible qualities is restricted such that variety seeking softens competition, competing firms choose to minimally differentiate themselves from each other. The preference for variety can drive the firms to offer multiunit discounts, and the greater price flexibility from these discounts does not necessarily reduce profits relative to simple unit pricing.