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Strategic Quality Choice Under Uncertainty: A Real Options Approach

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  • GRZEGORZ PAWLINA
  • PETER M. KORT

Abstract

In this paper we study the effects of demand uncertainty and imperfect competition on market entry and product quality choice. We allow for either fixed or flexible quality. Under a fixed quality choice, the follower chooses a higher quality provision. Quality is shown to generally increase with the volatility of demand. The strategic quality choice by the follower may trigger the exit of the leader. Furthermore, flexibility in the leader's quality choice can constitute a strategic disadvantage. Finally, the degree of horizontal differentiation between the supplied goods plays a pivotal role in determining the market structure in the long run. Copyright � 2009 The Authors. Journal compilation � 2009 Blackwell Publishing Ltd and The University of Manchester.

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Bibliographic Info

Article provided by University of Manchester in its journal The Manchester School.

Volume (Year): 78 (2010)
Issue (Month): 1 (01)
Pages: 1-19

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Handle: RePEc:bla:manchs:v:78:y:2010:i:1:p:1-19

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Cited by:
  1. Thijssen, J.J.J. & Huisman, K.J.M. & Kort, P.M., 2002. "Symmetric Equilibrium Strategies in Game Theoretical Real Option Models," Discussion Paper 2002-81, Tilburg University, Center for Economic Research.
  2. Jacco J.J. Thijssen, . "Equilibria in Continuous Time Preemption Games with Markovian Payoffs," Discussion Papers 11/17, Department of Economics, University of York.
  3. Tamini, Lota D., 2012. "Optimal quality choice under uncertainty on market development," MPRA Paper 40845, University Library of Munich, Germany.
  4. Tamini, Lota Dabio, 2012. "Optimal quality choice under uncertainty on market development," Working Papers 148589, Structure and Performance of Agriculture and Agri-products Industry (SPAA).

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