Date of Graduation

Spring 2016

Document Type

Honors Research Project

Degree Name

Bachelor of Arts

Major

Economics

Research Sponsor

Dr. Francesco Renna

First Reader

Dr. Stefan Forcey

Second Reader

Dr. Curtis Clemons

Abstract

Within any industry, firms typically produce related products over multiple subsequent periods in an attempt to build consumer loyalty and achieve continued sales. Apple releases new iPhones and car companies produce new models every year, relying on consumers believing each new product is of high quality. Firms rely on the spillover effects from previous markets, where firms are able to more easily demonstrate their product's quality to the consumers before purchase. The goal is to find a range of prices which allows the high quality firm to distinguish its type to consumers via the price pH and if spillover effects in subsequent markets can occur. We look at a duopoly of two firms, of high and low qualities, where each firm produces a product in an initial market and a second, related product in a subsequent market. Using each firm's expected profits, based on Bayesian probabilities, we analyze a firm's mimicking strategy to find the range of pH that allows for a separating equilibrium and spillover effects. In a second market where firms are the same qualities as in the first market, the high quality firm experiences spillover effects and can signal its quality with a lower price than in the first market. When firms change qualities in the second market, no spillover effect occurs and the newly high quality firm must increase pH from the previous market in order to separate.

Share

COinS