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Strategic Quality Choice with Minimum Quality Standards

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Author Info
Lutz, Stefan
Lyon, Thomas P
Maxwell, John W

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Abstract

In many markets governments set minimum quality standards while some sellers choose to compete on the basis of quality by exceeding them. Such ‘high-quality’ strategies often win public acclaim, especially when ‘environmental friendliness’ is the dimension along which firms are differentiated. We analyse this phenomenon using a duopoly model of vertical product differentiation. A minimum quality standard leads both the high-quality and the low-quality firm to increase product qualities, lower prices, and increase quantities sold. As a result, total welfare increases. Industry profits fall, however, because reduced quality differentiation intensifies price competition. If the high-quality firm can commit to a quality level before regulations are promulgated, it induces the regulator to weaken its standards, and welfare falls.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1793.

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Date of creation: Jan 1998
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Handle: RePEc:cpr:ceprdp:1793

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Related research
Keywords: Environment; Product Differentiation; Quality; Regulation;

Find related papers by JEL classification:
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

Cited by:
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  1. Scatasta, Sara & Wesseler, Justus & Hobbs, Jill, 2005. "The Impact of Labeling Practices on Perceived Quality of GM Food Products: A Revealed Preferences Approach," 2005 International Congress, August 23-27, 2005, Copenhagen, Denmark 24599, European Association of Agricultural Economists. [Downloadable!]
  2. Lander Beloqui & Jose M. Usategui, 2004. "Overcompliance with minimum quality standards," Investigaciones Economicas, Fundación SEPI, vol. 28(2), pages 233-255, May. [Downloadable!]
  3. Ronald B. Davies, 2000. "Abstinence from Child Labor and Profit Seeking," University of Oregon Economics Department Working Papers 2000-1, University of Oregon Economics Department, revised 01 Aug 2002. [Downloadable!]
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