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Price versus Quantity: Market-Clearing Mechanisms When Consumers Are Uncertain about Quality

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  • Metrick, Andrew
  • Zeckhauser, Richard

Abstract

High-quality producers in a market where quality varies can reap superior profits by charging higher prices, selling greater quantities, or both. Empirical analyses of the mutual fund and automobile industries show that high-quality producers sell more units than their low-quality competitors, but at no higher price (or retail markup) per unit. Our theoretical models find that if qualities are known by consumers and production costs are constant, then having a higher quality secures the producer both higher price and higher quantity. The market may clear in a different fashion if there is "quality uncertainty"; that is, if some consumers can discern quality but others cannot. Then, high- and low-quality producers may end up setting a common price, which allows the high-quality producer to sell substantially more. In this context, quality begets quantity. Copyright 1998 by Kluwer Academic Publishers

Suggested Citation

  • Metrick, Andrew & Zeckhauser, Richard, 1998. "Price versus Quantity: Market-Clearing Mechanisms When Consumers Are Uncertain about Quality," Journal of Risk and Uncertainty, Springer, vol. 17(3), pages 215-242, December.
    • Handle: RePEc:kap:jrisku:v:17:y:1998:i:3:p:215-42
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    Cited by:

    1. Nicole J. Saam, 2005. "The Role of Consumers in Innovation Processes in Markets," Rationality and Society, , vol. 17(3), pages 343-380, August.
    2. Gil-Bazo, Javier, 2001. "Portfolio management fees: assets or profits based compensation?," DEE - Working Papers. Business Economics. WB wb012207, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    3. Ariadna Dumitrescu & Javier Gil-Bazo, 2015. "Familiarity and competition: the case of mutual funds," Economics Working Papers 1474, Department of Economics and Business, Universitat Pompeu Fabra.
    4. Lemeunier, Sébastien Michel, 2021. "Information Asymmetry and the Mutual Fund Market," The Quarterly Review of Economics and Finance, Elsevier, vol. 81(C), pages 440-448.
    5. Dumitrescu, Ariadna & Gil-Bazo, Javier, 2018. "Market frictions, investor sophistication, and persistence in mutual fund performance," Journal of Financial Markets, Elsevier, vol. 40(C), pages 40-59.
    6. Gerard J. Tellis & Joseph Johnson, 2007. "The Value of Quality," Marketing Science, INFORMS, vol. 26(6), pages 758-773, 11-12.
    7. Hoffmann, Ruben, 2002. "Ownership Structure And Endogenous Quality Choice," 2002 Annual meeting, July 28-31, Long Beach, CA 19869, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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