Workers' skills, product quality and industry equilibrium
In this paper we develop a model of a vertically differentiated industry where the production of higher quality goods needs a higher fraction of specialized labour. In the first stage, firms choose the quality of their products, in the second, both good prices and skilled workers’ wages are determined. We show that in duopoly, though supplying different variants of the product, firms tend to cluster either at the bottom or at the top of the quality ladder, depending on skilled labour availability. This switch in equilibrium qualities creates a discontinuous behaviour for the wage rate of skilled workers. When the supply of skilled labour is made endogenous, two equilibria are simultaneously possible: one with low-skill, low quality, the other with high-skill, high-quality.
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- Esther Gal-Or, 1983. "Quality and Quantity Competition," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 590-600, Autumn.
- Redding, Stephen, 1996. "The Low-Skill, Low-Quality Trap: Strategic Complementarities between Human Capital and R&D," Economic Journal, Royal Economic Society, vol. 106(435), pages 458-70, March.
- Michael Kremer, 1993. "The O-Ring Theory of Economic Development," The Quarterly Journal of Economics, Oxford University Press, vol. 108(3), pages 551-575.
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