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Producers bargaining over a quality standard

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  • Argenton, Cédric

    ()
    (Dept. of Economics, Stockholm School of Economics)

Abstract

We study an asymmetric information model in which two firms are active on a market where buyers only observe the average quality supplied. Quantities and cost structures are exogenously given and firms compete in quality. Before choosing their qualities, they bargain over a perfectly enforcable minimum quality standard. The bargaining outcome is given by the Kalai-Smorodinsky (KS) solution. Agreement on a binding standard is possible only if the firms are sufficiently similar with respect to their production costs. The agreed-upon standard always falls short of the joint-profit-maximizing (or, for that matter, the efficient) level. It is decreasing in the high-cost producer's cost of production. Yet, it first increases then decreases with the low-cost producer's cost of production, showing that the latter's bargaining position can be enhanced by seemingly adverse cost changes.

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Bibliographic Info

Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 618.

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Length: 38 pages
Date of creation: 30 Dec 2005
Date of revision: 18 Jan 2006
Handle: RePEc:hhs:hastef:0618

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Keywords: asymmetric information; minimum quality standard; duopoly; bargaining; free riding.;

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References

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  1. Giulio Ecchia & Luca Lambertini, 1995. "Minimum Quality Standards and Collusion," Working Papers 235, Dipartimento Scienze Economiche, Universita' di Bologna.
  2. Scarpa, Carlo, 1998. "Minimum quality standards with more than two firms1," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 16(5), pages 665-676, September.
  3. Crampes, C. & Hollander, A., 1991. "Duopoly and Quality Standards," Cahiers de recherche, Universite de Montreal, Departement de sciences economiques 9128, Universite de Montreal, Departement de sciences economiques.
  4. Valletti, Tommaso M, 2000. "Minimum Quality Standards under Cournot Competition," Journal of Regulatory Economics, Springer, Springer, vol. 18(3), pages 235-45, November.
  5. Eiichi Miyagawa, 2002. "Subgame-perfect implementation of bargaining solutions," Discussion Papers, Columbia University, Department of Economics 0102-16, Columbia University, Department of Economics.
  6. Josh Lerner & Jean Tirole, 2004. "A Model of Forum Shopping, with Special Reference to Standard Setting Organizations," NBER Working Papers 10664, National Bureau of Economic Research, Inc.
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Cited by:
  1. Stefan Napel & Gunnar Oldehaver, 2011. "A dynamic perspective on minimum quality standards under Cournot competition," Journal of Regulatory Economics, Springer, Springer, vol. 39(1), pages 29-49, February.
  2. Stefan Napel & Gunnar Oldehaver, 2007. "Static Costs vs. Dynamic Benefits of a Minimum Quality Standard under Cournot Competition," Discussion Papers, Aboa Centre for Economics 23, Aboa Centre for Economics.

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