Competition through second-hand products when consumers differ in risk aversion

When consumers differ in their attitude towards risk, price competition between products of uncertain characteristics may be analyzed using address-models of product differentiation. These models provide a natural set-up for analyzing industries in which products of different reliability may coexist. This is in particular the case of second-hand markets. For such industries, we characterize the Nash equilibrium in prices and the associated market outcomes. They are shown to depend mainly on the distribution of risk aversion in the population. When the degree of reliability is chosen before price competition takes place, maximal differentiation results, yielding either horizontal or vertical differentiation configurations.