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Quality differentiation if market share matters

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  • Ellert, Alexander
  • Urmann, Oliver
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    Abstract

    Using a vertical differentiation model, we investigate the product quality strategies of two competing firms maximizing market shares. The firms are facing variable costs of quality improvement and choose their prices under the constraint of nonnegative profits. We show that in equilibrium there is no differentiation in quality if the market coverage is either increasing or decreasing and concave in quality. Otherwise the existence of an equilibrium depends on the structure of the game. If the firms choose their qualities simultaneously there is no equilibrium, while there is an equilibrium with a first mover advantage and quality differentiation in the sequential quality competition. --

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    Bibliographic Info

    Paper provided by University of Hamburg, Institute for Risk and Insurance in its series Working Papers on Risk and Insurance with number 25.

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    Date of creation: 2010
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    Handle: RePEc:zbw:hzvwps:25

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    Related research

    Keywords: Market share maximiziation; Vertical differentiation; Health care market;

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    1. Richard Steinberg, 1986. "The Revealed Objective Functions of Nonprofit Firms," RAND Journal of Economics, The RAND Corporation, vol. 17(4), pages 508-526, Winter.
    2. Jaskold Gabszewicz, J. & Thisse, J. -F., 1979. "Price competition, quality and income disparities," Journal of Economic Theory, Elsevier, Elsevier, vol. 20(3), pages 340-359, June.
    3. Aoki, Reiko & Prusa, Thomas J., 1997. "Sequential versus simultaneous choice with endogenous quality," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 15(1), pages 103-121, February.
    4. Boom, Anette, 1995. "Asymmetric International Minimum Quality Standards and Vertical Differentiation," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 43(1), pages 101-19, March.
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