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Workers' skills, product quality and industry equilibrium

  • Gabszewicz, J.
  • Turrini, A.

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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Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 18 (2000)
Issue (Month): 4 (May)
Pages: 575-593

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Handle: RePEc:eee:indorg:v:18:y:2000:i:4:p:575-593
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505551

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