Neutral or Not? The Role of Uncertainty-Induced Feelings in Vertical Competition

Abstract

We study a duopoly vertical competition in which one firm sells a transparent product and the other sells an uncertain product that may induce consumer feelings. We identify a neutrality condition under which those feelings do not affect either firm’s profit, but this neutrality can be broken. The provider of an uncertain (resp., transparent) product can benefit from (resp., be harmed by) the negative consumer feelings associated with uncertainty. We use regret and risk aversion to illustrate our results and the underlying mechanism: reverse quality discrimination (i.e., consumer perceived quality for an uncertain product decreases within their taste for quality).