View by Day

Jana Friedrichsen

University of Mannheim, Germany

Abstract: Many consumers value a good not only for its intrinsic characteristics such as its quality but also for the image associated with buying it. A rational producer takes such image concerns into account and designs products accordingly. In this paper I study quality provision and pricing when some consumers care about their image while others do not. I show that heterogeneous image concerns induce product differentiation which is not driven by heterogeneous valuations for quality, in the sense that consumers with identical quality valuations buy products with different quality levels. This holds both for a monopolistic market and in a fully competitive setting. Under competition both average quality and market coverage are (weakly) higher than under monopoly. Surprisingly, higher concerns for the image of quality can even decrease quality provision in monopoly. By restricting the product space, monopoly allows for more efficient allocation of image and thus may yield higher welfare than competition.

Keywords: image motivation, conspicuous consumption, two-dimensional screening, ethical consumption

JEL-Code: D21, D82, L15

Full Text: “Image concerns and the provision of quality”