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Reduced Quality and an Unlevel Playing Field Could Make Consumers Happier

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  • Nahum D. Melumad

    (Graduate School of Business, Columbia University, 3022 Broadway, New York, New York 10027-6902)

  • Amir Ziv

    (Arison School of Business, Interdisciplinary Center Herzliya (IDC), Kanfai Nesharim Street, Herzliya, 46150 Israel)

Abstract

We study a model of imperfect competition and limited production capacity in which a key feature is the trade-off between quality and quantity. In particular, lowering product quality enables firms to increase total production. We illustrate that, in the presence of limited capacity, the choice of lower quality often results in increased social welfare. We also explore the relation between the extent of competition and the choice of quality. We find that, in some cases, reduced competition leads to increased production, decreased average quality, increased total welfare, and makes consumers better off. Finally, we consider the possibility of regulator-mandated quality standards. Imposing high-quality standards never improves welfare in our model. On the other hand, mandating an upper bound on quality could either increase or decrease welfare in either a monopoly or a duopoly market.

Suggested Citation

  • Nahum D. Melumad & Amir Ziv, 2004. "Reduced Quality and an Unlevel Playing Field Could Make Consumers Happier," Management Science, INFORMS, vol. 50(12), pages 1646-1659, December.
    • Handle: RePEc:inm:ormnsc:v:50:y:2004:i:12:p:1646-1659
    DOI: 10.1287/mnsc.1040.0277
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    References listed on IDEAS

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    Cited by:

    1. Chen, You-hua & Huang, Sun-jun & Mishra, Ashok K. & Wang, X. Henry, 2018. "Effects of input capacity constraints on food quality and regulation mechanism design for food safety management," Ecological Modelling, Elsevier, vol. 385(C), pages 89-95.
    2. Antelo, Manel & Bru, Lluís, 2022. "Product licensing in a Stackelberg industry," MPRA Paper 113985, University Library of Munich, Germany.
    3. Kejia Hu & Sunil Chopra & Yuche Chen, 2021. "The Effect of Tightening Standards on Automakers’ Non‐compliance," Production and Operations Management, Production and Operations Management Society, vol. 30(9), pages 3094-3115, September.
    4. Antelo, Manel & Bru, Lluís, 2023. "Licensing a product innovation in a Cournot industry," MPRA Paper 116631, University Library of Munich, Germany.

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