Can High Prices Ensure Product Quality When Buyers do not Know the Sellers' Cost?

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Can High Prices Ensure Product Quality When Buyers do not Know the Sellers' Cost?

Author Info

Eric Rasmusen (Indiana University, Kelley School of Business)
Timothy Perri (Appalachian State University)

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Abstract

The Klein-Leffler (1981) model of product quality does not explain why high-quality firms would dissipate the rents they earn from quality- assuring price premia, and it relies on consumers knowing the cost functions of firms. In the present paper, consumers do not know any firm's cost of producing quality goods, so high-quality firms must engage in conspicuous spending to demonstrate they earn a profitable mark-up over cost. Complete rent dissipation occurs only when high and low cost firms have the same cost of producing low quality.

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Paper provided by EconWPA in its series Industrial Organization with number 9907002.

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Date of creation: 13 Jul 1999
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Handle: RePEc:wpa:wuwpio:9907002

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Article
- Rasmusen, Eric B & Perri, Timothy J, 2001. "Can High Prices Ensure Product Quality when Buyers Do Not Know the Sellers' Cost?," Economic Inquiry, Oxford University Press, vol. 39(4), pages 561-67, October.

Find related papers by JEL classification:
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

References listed on IDEAS
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.:

Breen, Denis A, 1977. "The Monopoly Value of Household-Goods Carrier Operating Certificates," Journal of Law & Economics, University of Chicago Press, vol. 20(1), pages 153-85, April.
Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August. [Downloadable!] (restricted)

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Cited by:
(explanations, 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.)

Eric Rasmusen, 2007. "A Reputation Model of Quality in North-South Trade," Working Papers 2007-06, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy. [Downloadable!]

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This page was last updated on 2009-11-13.

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