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Market Structure, Quality and Durability

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  • David Levhari
  • Yoram Peles
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    Abstract

    This paper analyzes the effects of market structure -- monopoly versus competition -- on the quality and durability of goods. Also, it tries to find the impact of government regulation on these variables. The types of quality improvements discussed are: quality as pure substitute for quantity; quality which increases the demand for the good; and quality improvement which increases the durability of the good. In general, it is impossible to deduce that quality is independent of market structure. It depends on the cost structure. The paper shows that when quality is a substitute for quantity, both quality and quantity of the monopoly might fall short of those in the competitive market. Regulating only quality, or only quantity, may increase the monopoly misallocations of resources. In other types of quality improvements discussed, it may turn out that quality and durability may be better or worse in the monopolized industry than in the competitive one. Regulating only quality may improve the resource allocation but not eliminate the bias. Quantity regulation by itself may be sufficient for producing the optimal flow of services.

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    Bibliographic Info

    Article provided by The RAND Corporation in its journal Bell Journal of Economics.

    Volume (Year): 4 (1973)
    Issue (Month): 1 (Spring)
    Pages: 235-248

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    Handle: RePEc:rje:bellje:v:4:y:1973:i:spring:p:235-248

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    Cited by:
    1. Sibly, Hugh, 2012. "A decomposition of monopolistic quality distortion," Research in Economics, Elsevier, vol. 66(1), pages 97-105.
    2. Sibly, Hugh, 2008. "Quality Versus Quantity in Vertically Differentiated Products Under Non-Linear Pricing," Working Papers 7335, University of Tasmania, School of Economics and Finance, revised 01 Jun 2008.
    3. Strausz, Roland, 2009. "Monopoly distortions in durability and multi-dimensional quality," Economics Letters, Elsevier, vol. 105(3), pages 333-335, December.
    4. Morton I. Kamien & Nancy Schwartz, 1975. "Optimal Capital Accumulation and Durable Goods Production," Discussion Papers 141, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    5. Dor, Avi & Farley, Dean E., 1996. "Payment source and the cost of hospital care: Evidence from a multiproduct cost function with multiple payers," Journal of Health Economics, Elsevier, vol. 15(1), pages 1-21, February.
    6. Shulamit Kahn, 1991. "Does Employer Monopsony Power Increase Occupational Accidents? The Case of Kentucky Coal Mines," NBER Working Papers 3897, National Bureau of Economic Research, Inc.
    7. Sibly, Hugh, 2008. "Vertical Product Differentiation with Linear Pricing," Working Papers 7335, University of Tasmania, School of Economics and Finance, revised 01 Jul 2008.
    8. Noel Uri, 2003. "Service Quality Effects of Incentive Regulation on Access Service in Telecommunications in the United States," European Journal of Law and Economics, Springer, vol. 16(3), pages 369-390, November.
    9. Sibly, Hugh, 2007. "Loss aversion, price and quality," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 36(5), pages 771-788, October.
    10. Arora, Ashish & Forman, Chris & Nandkumar, Anand & Telang, Rahul, 2010. "Competition and patching of security vulnerabilities: An empirical analysis," Information Economics and Policy, Elsevier, vol. 22(2), pages 164-177, May.
    11. Facanha, Luis Otavio & Resende, Marcelo, 2004. "Price cap regulation, incentives and quality:: The case of Brazilian telecommunications," International Journal of Production Economics, Elsevier, vol. 92(2), pages 133-144, November.

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