Endogenous differentiation of consumer preferences under quality uncertainty in a SPA network

Abstract

We study a duopoly market on which there is uncertainty of a product quality. Consumers adaptively learn about quality of products when they buy them (direct learning) or from other consumers with whom they are interacting in a social network modelled as a SPA graph (indirect learning). We show that quality uncertainty present in such a market leads to endogenous segmentation of consumers’ preferences towards suppliers. Additionally, we show that in this setting, even if both companies have the same expected quality, the company with lower variance of quality will gain higher market share.