Price and variety in the Salop model

Abstract

Using a Salop circle model, this research analyzes the welfare implications of firm/product entry with information provision by consumers. While firms use consumer information to target sales efforts, consumers face privacy trade-offs when providing their personal information. We show that (i) price and profit first increase, then decrease with more varieties; (ii) consumer welfare, affected by price, sales effort, privacy loss, and matching effects, first decreases, then increases with firm entry; (iii) equilibrium information is socially optimal given the number of varieties; and (iv) if the variable cost of providing sales assistance is low (high), free entry leads to too much (few) varieties and too little (more) information, from a social welfare standpoint.