Salience and horizontal differentiation

Abstract

AbstractI study a horizontal differentiation model in which one of two attributes of a product, product fit and price, is more salient for a consumer than the other and different consumers can find a different attribute salient. The attribute that is more salient is determined by relative differences between the two products and is determined endogenously as a result of firms' pricing strategies. High (low) marginal costs soften (toughen) price competition between firms. Pass‐through rates are greater than 1 for some parameter values. Both industry‐ and firm‐level cost increases may be beneficial for firms.