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Does a Minimum Quality Standard Always Reduce the Price of High Quality Products?

Author

Listed:
  • Panzar John C

    (University of Auckland)

  • Savage Ian

    (Northwestern University)

Abstract

This paper investigates the standard finding that instituting a minimum quality standard within a vertically differentiated market unambiguously benefits consumers of high quality products. A competitive model is specified in which random cost shocks lead some firms to cheat in equilibrium on their reputation for high quality. When cheating occurs, instituting or raising the level of a minimum standard can lead to the price of high quality products either increasing or decreasing. The effect of a minimum quality standard on the price of high quality products becomes an empirical rather than a theoretical issue.

Suggested Citation

  • Panzar John C & Savage Ian, 2011. "Does a Minimum Quality Standard Always Reduce the Price of High Quality Products?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-32, June.
  • Handle: RePEc:bpj:bejeap:v:11:y:2011:i:1:n:39
    DOI: 10.2202/1935-1682.2333
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    References listed on IDEAS

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    Cited by:

    1. Mihaela Schaar & Simpson Zhang, 2015. "A dynamic model of certification and reputation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 58(3), pages 509-541, April.

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