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Monopoly provision of product quality with uninformed buyers

Author

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  • Cooper, Russell
  • Ross, Thomas W.

Abstract

This essay is concerned with a monopolist's incentives to provide a high quality goods when some of its customers cannot observe quality prior to purchase. We show that if all buyers have the same tastes for quality, the monopolist will not try to take advantage of the poorly informed. When tastes differ, however, some quality randomization may become profitable as a means to loosen binding self-selection constraints. The profitability of randomization is shown to depend upon the relative degrees of risk aversion of the buyers and on the convexity of the firm's cost of quality function. We view our results as pointing to some potential benefits from imperfect quality control.
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Suggested Citation

  • Cooper, Russell & Ross, Thomas W., 1985. "Monopoly provision of product quality with uninformed buyers," International Journal of Industrial Organization, Elsevier, vol. 3(4), pages 439-449, December.
    • Handle: RePEc:eee:indorg:v:3:y:1985:i:4:p:439-449
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    Citations

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    Cited by:

    1. Kyle Bagwell & Michael Riordan, 1986. "Equilibrium Price Dynamics for an Experience Good," Discussion Papers 705, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    2. Oren Gazal-Ayal, 2007. "Economic analysis of standard form contracts: the monopoly case," European Journal of Law and Economics, Springer, vol. 24(2), pages 119-136, October.
    3. Dogan Tirtiroglu & Ercan Tirtiroglu, 2020. "Seller Financing: Contracting Out of the Lemons and Moral Hazard Problems When They May Co-Exist," American Business Review, Pompea College of Business, University of New Haven, vol. 23(2), pages 335-357.
    4. Bester, Helmut & Ritzberger, Klaus, 2001. "Strategic pricing, signalling, and costly information acquisition," International Journal of Industrial Organization, Elsevier, vol. 19(9), pages 1347-1361, November.
    5. Thomas Liebi, 2003. "The Demand for Tests," Diskussionsschriften dp0307, Universitaet Bern, Departement Volkswirtschaft.
    6. Takaoka, Sumiko, 2005. "The effects of product liability costs on R&D with asymmetric information," Japan and the World Economy, Elsevier, vol. 17(1), pages 59-81, January.
    7. Daughety, Andrew F & Reinganum, Jennifer F, 1995. "Product Safety: Liability, R&D, and Signaling," American Economic Review, American Economic Association, vol. 85(5), pages 1187-1206, December.
    8. Ellingsen, Tore, 1997. "Price signals quality: The case of perfectly inelastic demand," International Journal of Industrial Organization, Elsevier, vol. 16(1), pages 43-61, November.
    9. Moraga-Gonzalez, Jose Luis, 2000. "Quality uncertainty and informative advertising," International Journal of Industrial Organization, Elsevier, vol. 18(4), pages 615-640, May.
    10. Benhabib, Jess & Dong, Feng & Wang, Pengfei, 2018. "Adverse selection and self-fulfilling business cycles," Journal of Monetary Economics, Elsevier, vol. 94(C), pages 114-130.
    11. Baomin Dong & Guixia Guo & Frank Yong Wang, 2021. "A signalling model of loss leader pricing strategy," Australian Economic Papers, Wiley Blackwell, vol. 60(2), pages 289-307, June.
    12. Bagwell, Kyle & Riordan, Michael H, 1991. "High and Declining Prices Signal Product Quality," American Economic Review, American Economic Association, vol. 81(1), pages 224-239, March.

    More about this item

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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