Product differentiation in electronic markets

Developing product differentiation models, this dissertation examines three major product competition phenomena in electronic markets: mass customization of consumer goods, product line design for information goods, and informative narrowcasting (or targeted advertising).; The Internet and advanced manufacturing technologies provide an unprecedented capability for firms to learn about their customers and offer tailored products at special prices. I study the competition between firms adopting customization. Simultaneous adoption of customization by a duopoly reduces the differentiation between their standard products but does not intensify price competition. Consumer surplus improves after adoption but does not monotonically increase as technologies advance. When firms face a fixed entry cost, the first entrant may be able to deter future entry by choosing its customization scope strategically.; Positive externalities characterize the usage of many information goods such as software and online content services including virtual communities. I show that network externality is critical for the product line structure of such information goods. A multi-product monopoly offers exactly two distinct qualities. In addition, the low quality may be offered for free to maximize the network effects. Facing high-end competition, a low-end seller never segments its market. However, the high-end seller may offer two products if it has a clear-cut quality advantage.; Reduced costs of information collection and processing have made narrowcasting a reality. A narrowcasting firm has to choose its scale of learning (or learning intensity) and identify the target group of consumers. When consumers search, the firm can further take advantage of their search patterns. Improvement in narrowcasting technologies leads to higher learning intensities and lower prices when search cost is greater than fit cost, but does not affect price when search cost is less than fit cost.