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Strategic Choice of Quality When Quality is Costly: The Persistence of the High-Quality Advantage

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  • Ulrich Lehmann-Grube
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    Abstract

    In a two-firm, two-stage model of vertical product differentiation, I show that for every convex fixed-cost function of quality, the firm that chooses the higher quality at the first stage earns the higher profits. The result holds for the pure-strategy equilibrium in the simultaneous-quality game, and it holds as well if firms choose their qualities in sequential order.

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    Bibliographic Info

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

    Volume (Year): 28 (1997)
    Issue (Month): 2 (Summer)
    Pages: 372-384

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    Handle: RePEc:rje:randje:v:28:y:1997:i:summer:p:372-384

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    Cited by:
    1. Lutz, Stefan & Lyon, Thomas P & Maxwell, John W, 2000. "Quality Leadership When Regulatory Standards Are Forthcoming," Journal of Industrial Economics, Wiley Blackwell, vol. 48(3), pages 331-48, September.
    2. Minten, Bart, 2007. "The food retail revolution in poor countries: Is it coming or is it over? Evidence from Madagascar," IFPRI discussion papers 719, International Food Policy Research Institute (IFPRI).
    3. Nathan H. Miller, 2008. "Competition When Consumers Value Firm Scope," EAG Discussions Papers 200807, Department of Justice, Antitrust Division.
    4. Balan, David J. & Deltas, George, 2013. "Better product at same cost, lower sales and lower welfare," International Journal of Industrial Organization, Elsevier, vol. 31(4), pages 322-330.
    5. Eugen Kovac & Kresimir Zigic, 2007. "International Competition in Vertically Differentiated Markets with Innovation and Imitation: Trade Policy versus Free Trade," CERGE-EI Working Papers wp336, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
    6. Yurko, Anna V., 2011. "How does income inequality affect market outcomes in vertically differentiated markets?," International Journal of Industrial Organization, Elsevier, vol. 29(4), pages 493-503, July.
    7. Noh, Yong-Hwan & Moschini, GianCarlo, 2005. "Vertical Product Differentiation, Entry-Deterrence Strategies, and Entry Qualities," Staff General Research Papers 12412, Iowa State University, Department of Economics.

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