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Abstract

A fuzzy product (FP) has characteristics specified only imprecisely at time of sale. Building fuzziness into its product gives a firm flexibility to exploit favorable supply opportunities that arise between sale and delivery, and so reduce expected costs. While increased competition reduces price, the effect on fuzziness is ambiguous. Socially-optimal fuzziness is characterized. Firms provide goods that are too fuzzy compared to first-best, though entry serves to correct this inefficiency for certain types of goods. Considering competition with a niche good, a FP sells for a lower price, although it captures a larger market share and is more profitable.

5. Conclusion

In this paper we develop a model of fuzzy products and analyze its positive and normative implications. While the model shares a similar structure to models of horizontal and vertical product differentiation (e.g., Economides, 1993; Brekke et al., 2010) and experience goods (e.g., Riordan, 1986), this structure comes out of a model of only horizontal differentiation. By having firms sell lotteries over product characteristics, the model can be seen as generalizing the standard model of horizontal differentiation (Salop, 1979). While firms provide goods that are too vague in equilibrium relative to first-best, whether increased competition reduces or further increases fuzziness depends on the nature of the good. For goods produced by the seller, competition reduces fuzziness because of the impact of competition on price, and with free entry into the market first-best fuzziness can be achieved. When the seller contracts provision of the good from a producer, increased competition now exerts a direct influence on a firm's decision to design a fuzzy product and acts to increase product fuzziness when market price is insensitive to increased competition. In this latter case, at least for goods that represent a small fraction of consumer income, the good is fuzzier in equilibrium than if the seller produced the good itself. An integrated firm has less incentive to produce vague products than does a firm with a separate supply chain. Comparing a fuzzy product with a niche good, firms that offer a fuzzy product are more profitable, reaching a wide set of consumers, even though the fuzzy product sells for less. If a firm is able to sell a fuzzy product, it will wish to do so, even in a competitive setting. One point abstracted from in the analysis of fuzzy products is the possibility of bargaining between parties. In the context of an offplan condominium (Example 1), the buyer may be able to bargain with the seller over the set of possible product characteristics. While not treated here, this is an interesting point for future research.