Credence Goods, Consumer Misinformation, and Quality
AbstractFor certain products, consumers' misinformation about quality is more endemic at intermediate levels of the quality spectrum rather than at the top or the bottom levels of quality. Using an oligopoly model of vertical product differentiation with three quality levels - green, natural, and brown - we examine the consequences of consumers' overestimation of the quality of the natural (i.e. intermediate quality) product. There are three firms in the market, with each type of firm producing the corresponding type of the product. The firms choose the quality level of their product before choosing its price (Bertrand case) or quantity (Cournot case). Irrespective of the nature of second stage competition, we find that quality overestimation by consumers increases profit of the natural firm, and motivates it to raise its product’s quality. In response, the green firm improves its quality even further, but ends up with lower profit. Overall, average quality of the vertically differentiated product improves, which raises consumer surplus. Social welfare increases when firms compete in prices but falls when they compete in quantities.
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Bibliographic InfoPaper provided by The University of Winnipeg, Department of Economics in its series Departmental Working Papers with number 2012-01.
Length: 23 pages
Date of creation: Jun 2012
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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
- M30 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-07-01 (All new papers)
- NEP-BEC-2012-07-01 (Business Economics)
- NEP-COM-2012-07-01 (Industrial Competition)
- NEP-TID-2012-07-01 (Technology & Industrial Dynamics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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