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Vertical Differentiation with Variety-Seeking Customers

We analyze price and quality competition in a vertically differentiated duopoly in which consumers have a preference for variety. The variety-seeking preferences are a consequence of diminishing marginal utility for repeated consumption experiences of the same product. We find that variety-seeking preferences can either soften or intensify price competition, depending on the range of feasible qualities and the strength of consumer preference for variety. When the range of feasible qualities is small enough, prices are higher than would be obtained in the absence of variety seeking - leading to higher profits - and competing firms choose to minimally differentiate themselves from each other. On the other hand, if qualities are exogenously set to be different enough from each other then stronger preferences for variety are associated with moreintense price competition and lower profits