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Quality Improvement to Meet Competitive Fringe

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  • Noriaki Matsushima
  • Ren-Jye Liu

Abstract

We investigate what kind of competitive pressure induces existing firms to engage in more intensive innovation activities. We examine two types of competitive pressure: a price decrease in competitive fringe firms and a quality improvement therein. We use an oligopoly model with vertical differentiation to investigate this question. We show that a decrease in the exogenous price of competitive firms induces the two existent leading firms (one high-quality firm and one mid-quality firm) to engage in quality investments more if the ex ante quality level of the high quality product is large enough; otherwise, only the mid-quality firm engages more in quality investment. We also show that an increase in the exogenous quality level of competitive firms diminishes the incentive of the mid-quality firm to engage in quality investments.

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File URL: http://www.iser.osaka-u.ac.jp/library/dp/2012/DP0854.pdf
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Bibliographic Info

Paper provided by Institute of Social and Economic Research, Osaka University in its series ISER Discussion Paper with number 0854.

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Date of creation: Aug 2012
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Handle: RePEc:dpr:wpaper:0854

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  1. Nilssen, Tore & Pita Barros, Pedro Luis, 1998. "Industrial Policy and Firm Heterogeneity," CEPR Discussion Papers 1986, C.E.P.R. Discussion Papers.
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