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Monopoly provision of product quality with uninformed buyers

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  • Cooper, Russell
  • Ross, Thomas W.

Abstract

This essay is concerned with a monopolist's incentives to provide a high quality goods when some of its customers cannot observe quality prior to purchase. We show that if all buyers have the same tastes for quality, the monopolist will not try to take advantage of the poorly informed. When tastes differ, however, some quality randomization may become profitable as a means to loosen binding self-selection constraints. The profitability of randomization is shown to depend upon the relative degrees of risk aversion of the buyers and on the convexity of the firm's cost of quality function. We view our results as pointing to some potential benefits from imperfect quality control.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 3 (1985)
Issue (Month): 4 (December)
Pages: 439-449

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Handle: RePEc:eee:indorg:v:3:y:1985:i:4:p:439-449

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Web page: http://www.elsevier.com/locate/inca/505551

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References

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  1. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
  2. Chan, Yuk-Shee & Leland, Hayne, 1982. "Prices and Qualities in Markets with Costly Information," Review of Economic Studies, Wiley Blackwell, vol. 49(4), pages 499-516, October.
  3. Cooper, Russell & Ross, Thomas W, 1984. "Prices, Product Qualities and Asymmetric Information: The Competitive Case," Review of Economic Studies, Wiley Blackwell, vol. 51(2), pages 197-207, April.
  4. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-29, March-Apr.
  5. Grossman, Sanford J, 1981. "The Informational Role of Warranties and Private Disclosure about Product Quality," Journal of Law and Economics, University of Chicago Press, vol. 24(3), pages 461-83, December.
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Cited by:
  1. Oren Gazal-Ayal, 2007. "Economic analysis of standard form contracts: the monopoly case," European Journal of Law and Economics, Springer, vol. 24(2), pages 119-136, October.
  2. Kyle Bagwell & Michael Riordan, 1988. "High and Declining Prices Signal Product Quality," Discussion Papers 808, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Daughety, Andrew F & Reinganum, Jennifer F, 1995. "Product Safety: Liability, R&D, and Signaling," American Economic Review, American Economic Association, vol. 85(5), pages 1187-1206, December.
  4. Bester, Helmut & Ritzberger, Klaus, 2001. "Strategic pricing, signalling, and costly information acquisition," International Journal of Industrial Organization, Elsevier, vol. 19(9), pages 1347-1361, November.
  5. Moraga-Gonzalez, Jose Luis, 2000. "Quality uncertainty and informative advertising," International Journal of Industrial Organization, Elsevier, vol. 18(4), pages 615-640, May.
  6. Thomas Liebi, 2003. "The Demand for Tests," Diskussionsschriften dp0307, Universitaet Bern, Departement Volkswirtschaft.
  7. Ellingsen, Tore, 1997. "Price signals quality: The case of perfectly inelastic demand," International Journal of Industrial Organization, Elsevier, vol. 16(1), pages 43-61, November.

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