Quality differentiation and firm choice between online and offline markets-李三希 (中国人民大学)

 Growing with the prominence of e-commerce is the concern of researchers and policy-makers regarding product quality in online markets. We develop a theoretical framework to study firms' choices between online and physical markets with respect to product quality and competition. We investigate two contrasting driving forces: On the one hand, consumers cannot inspect an online product's quality prior to purchase. Conventional wisdom and some literature suggest that this drives low-quality products to hide themselves in the online market. On the other hand, the literature on vertical product differentiation indicates that a firm with a lower- quality may prefer to reveal its product quality in the physical market, because quality differentiation helps alleviate price competition. We show that overall each market can attract a large set of product qualities, ranging from the low-end to the high-end.