Vertically differentiated products are products with different quality levels. We consider a firm that offers two vertically differentiated products. The firm can offer each product by using one of two major pricing mechanisms: Posted-Price (PP) and Name-Your-Own-Price (NYOP). We investigate all four possible scenarios by which the firm can offer the products based on the pricing mechanisms. The firm should decide about the optimal combination of pricing mechanisms and the quality level of each product. A consumer, on the other hand, makes the decision about which product or service to use. We analyze each party’s decisions in each scenario and obtain the optimal scenario from the view of each party as well as a social planner. The results highlight the value of the traditional PP mechanism over the innovative NYOP mechanism from the view of a firm providing vertically differentiated products.
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