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Strategic Quality Decisions under Heterogeneous Resource Endowments

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  • Byong‐Duk Rhee
  • Seth W. Norton

Abstract

The literature on product competition advocates a differentiation strategy assuming firm homogeneity in resources. However, firm heterogeneity in resource endowments has long been recognized in economics. Merging these two perspectives, we show that the increase in consumer preference for quality leads to firms' aggressive price competition instead of quality differentiation. As consumers look for higher quality, the cost advantage arising from superior resources increases and makes head‐to‐head competition more profitable than accommodating a less efficient rival. When consumers are highly concerned about quality, even a small resource difference leads a more efficient firm to initiate cutthroat price competition for market dominance.

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  • Byong‐Duk Rhee & Seth W. Norton, 2001. "Strategic Quality Decisions under Heterogeneous Resource Endowments," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 10(2), pages 235-264, June.
    • Handle: RePEc:bla:jemstr:v:10:y:2001:i:2:p:235-264
    DOI: 10.1111/j.1430-9134.2001.00235.x
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    Cited by:

    1. Ye, Taofeng & Yang, Huiqiang, 2020. "Price and Quality Management with Strategic Consumers: Whether to Introduce a High or Low Product Variant," Applied Mathematics and Computation, Elsevier, vol. 386(C).

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