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On the Robustness of the High-Quality Advantage under Vertical Differentiation

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  • Robert Schmidt

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    Abstract

    The idea that the high-quality provider in a vertically differentiated duopoly earns the higher profit (the so-called “high-quality advantage”) appears to be an established fact among economists. This note shows that the high-quality advantage is not a robust feature of vertical differentiation models. A low-quality advantage can be predicted under perfectly plausible assumptions, such as a concave utility–quality and/or a convex unit cost–quality relation. The existence of a high- or a low-quality advantage depends on the nature of the firms’ strategic interaction. Copyright Springer Science + Business Media, LLC 2006

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    Bibliographic Info

    Article provided by Springer in its journal Journal of Industry, Competition and Trade.

    Volume (Year): 6 (2006)
    Issue (Month): 3 (December)
    Pages: 183-193

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    Handle: RePEc:kap:jincot:v:6:y:2006:i:3:p:183-193

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    Web page: http://springerlink.metapress.com/link.asp?id=105724

    Related research

    Keywords: vertical differentiation; high-quality advantage; maximum differentiation; covered market equilibrium; non-linearity; L13; L15;

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    1. Heidrun C. Hoppe & Ulrich Lehmann-Grube, 2001. "Second-Mover Advantages in Dynamic Quality Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 10(3), pages 419-433, 09.
    2. Choi, Chong Ju & Shin, Hyun Song, 1992. "A Comment on a Model of Vertical Product Differentiation," Journal of Industrial Economics, Wiley Blackwell, vol. 40(2), pages 229-31, June.
    3. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
    4. Wauthy, X., 1994. "Quality Choice in Models of Vertical Differentiation," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1994033, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    5. Crampes, C. & Hollander, A., 1991. "Duopoly and Quality Standards," Cahiers de recherche 9128, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    6. Shaked, Avner & Sutton, John, 1983. "Natural Oligopolies," Econometrica, Econometric Society, vol. 51(5), pages 1469-83, September.
    7. Grossman, G.M. & Helpman, E., 1989. "Quality Ledders In The Theory Of Growth," Papers 148, Princeton, Woodrow Wilson School - Public and International Affairs.
    8. Champsaur, Paul & Rochet, Jean-Charles, 1989. "Multiproduct Duopolists," Econometrica, Econometric Society, vol. 57(3), pages 533-57, May.
    9. Reiko Aoki, 2003. "Effect of credible quality investment with Bertrand and Cournot competition," Economic Theory, Springer, vol. 21(2), pages 653-672, 03.
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