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If at First You Don't Succeed: Profits, Prices, and Market Structure in a Model of Quality with Unknowable Consumer Heterogeneity

  • Kala Krishna
  • Tor Winston

Why are higher quality niches seen as intrinsically more profitable in business circles? Why do high quality products sometimes have a low real price, whereas it is unusual to see low quality products with high real prices? Can markets have quality differentiation as well as quality bunching? How does the rate at which fixed costs change with quality affect market structure? In this article we develop a new model of quality that casts light on such issues. Copyright 2003 By The Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

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Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 44 (2003)
Issue (Month): 2 (05)
Pages: 573-597

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Handle: RePEc:ier:iecrev:v:44:y:2003:i:2:p:573-597
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  1. Bouckaert, J.M.C. & Degryse, H.A., 1998. "Price competition between an expert and a non-expert," Discussion Paper 1998-49, Tilburg University, Center for Economic Research.
  2. Shetty, Y. K., 1987. "Product quality and competitive strategy," Business Horizons, Elsevier, vol. 30(3), pages 46-52.
  3. Kala Krishna & Tor Winston, 1998. "A New Model of Quality," NBER Working Papers 6580, National Bureau of Economic Research, Inc.
  4. Weitzman, Martin L, 1979. "Optimal Search for the Best Alternative," Econometrica, Econometric Society, vol. 47(3), pages 641-54, May.
  5. d'Aspremont, C & Gabszewicz, Jean Jaskold & Thisse, J-F, 1979. "On Hotelling's "Stability in Competition"," Econometrica, Econometric Society, vol. 47(5), pages 1145-50, September.
  6. Sheshinski, Eytan, 1976. "Price, Quality and Quantity Regulation in Monopoly Situations," Economica, London School of Economics and Political Science, vol. 43(17), pages 127-37, May.
  7. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
  8. Shaked, Avner & Sutton, John, 1983. "Natural Oligopolies," Econometrica, Econometric Society, vol. 51(5), pages 1469-83, September.
  9. Swan, Peter L, 1970. "Durability of Consumption Goods," American Economic Review, American Economic Association, vol. 60(5), pages 884-94, December.
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