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Better product at same cost, lower sales and lower welfare

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  • Balan, David J.
  • Deltas, George

Abstract

We consider a high-quality dominant firm facing a low-quality competitive fringe. We show that the dominant firm's quantity is (weakly) increasing in its quality if and only if its marginal cost (weakly) exceeds that of the fringe; otherwise it is strictly decreasing in quality. This result is driven by the fact that a quality increase causes the marginal revenue curve to rotate clockwise, rather than shift outwards, and at a height equal to the fringe firms' marginal cost. This fact, combined with the dominant firm's MR=MC condition, determines the result. For closely related reasons, the effect of a quality increase on consumer welfare also depends on the relationship between the costs. It is possible that all consumers are (weakly) better off, that some are better off and some worse off, or that all are (weakly) worse off. We also consider several extensions and variations of the model.

Suggested Citation

  • Balan, David J. & Deltas, George, 2013. "Better product at same cost, lower sales and lower welfare," International Journal of Industrial Organization, Elsevier, vol. 31(4), pages 322-330.
    • Handle: RePEc:eee:indorg:v:31:y:2013:i:4:p:322-330
    DOI: 10.1016/j.ijindorg.2013.04.004
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    References listed on IDEAS

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    Cited by:

    1. George Deltas & Eleftherios Zacharias, 2018. "Product Proliferation and Pricing in a Market with Positional Effects," Working Papers 242312853, Lancaster University Management School, Economics Department.
    2. David Balan & Patrick DeGraba & Francine Lafontaine & Patrick McAlvanah & Devesh Raval & David Schmidt, 2015. "Economics at the FTC: Fraud, Mergers and Exclusion," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 47(4), pages 371-398, December.
    3. Gremm, Cornelia & Bälz, David & Corbo, Chris & Mitusch, Kay, 2019. "Intermodal competition between intercity buses and trains: A theoretical model," Working Paper Series in Economics 135, Karlsruhe Institute of Technology (KIT), Department of Economics and Management.
    4. Cantner, Uwe & Vannuccini, Simone, 2021. "Pervasive technologies and industrial linkages: Modeling acquired purposes," Structural Change and Economic Dynamics, Elsevier, vol. 56(C), pages 386-399.

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    More about this item

    Keywords

    Product innovation; Vertical differentiation; Dominant firm; Competitive fringe;
    All these keywords.

    JEL classification:

    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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