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Price and quality competition

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  • Ioana Chioveanu

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Abstract

This study considers an oligopoly model with simultaneous price and quality choice. Ex-ante homogeneous sellers compete by offering products at one of two quality levels. The consumers have heterogeneous tastes for quality: for some consumers it is efficient to buy a high quality product, while for others it is efficient to buy a low quality product. In the symmetric equilibrium firms use mixed strategies that randomize both price and quality, and obtain strictly positive profits. This framework highlights trade-offs which determine the impact of consumer protection policy in the form of quality standards. Copyright Springer-Verlag 2012

Suggested Citation

  • Ioana Chioveanu, 2012. "Price and quality competition," Journal of Economics, Springer, vol. 107(1), pages 23-44, September.
    • Handle: RePEc:kap:jeczfn:v:107:y:2012:i:1:p:23-44
    DOI: 10.1007/s00712-011-0259-z
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    References listed on IDEAS

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    1. Mark Armstrong & Yongmin Chen, 2009. "Inattentive Consumers and Product Quality," Journal of the European Economic Association, MIT Press, vol. 7(2-3), pages 411-422, 04-05.
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    8. Leland, Hayne E, 1979. "Quacks, Lemons, and Licensing: A Theory of Minimum Quality Standards," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1328-1346, December.
    9. Mark Armstrong, 2008. "Interactions between Competition and Consumer Policy," CPI Journal, Competition Policy International, vol. 4.
    10. Valletti, Tommaso M, 2000. "Minimum Quality Standards under Cournot Competition," Journal of Regulatory Economics, Springer, vol. 18(3), pages 235-245, November.
    11. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, March.
    12. Michael R. Baye & John Morgan & Patrick Scholten, 2006. "Information, Search, and Price Dispersion," Working Papers 2006-11, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    13. Rosenthal, Robert W, 1980. "A Model in Which an Increase in the Number of Sellers Leads to a Higher Price," Econometrica, Econometric Society, vol. 48(6), pages 1575-1579, September.
    14. Uri Ronnen, 1991. "Minimum Quality Standards, Fixed Costs, and Competition," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 490-504, Winter.
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    Citations

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    Cited by:

    1. Sandro Shelegia & Chris M Wilson, 2014. "A Utility-Based Model of Sales with Informative Advertising," Discussion Paper Series 2014_09, Department of Economics, Loughborough University, revised Oct 2014.
    2. Alexander Karpov, 2016. "Health care inequality, patient mobility and welfare," Economics Bulletin, AccessEcon, vol. 36(2), pages 1000-1009.
    3. Chioveanu, Ioana, 2017. "Prominence, Complexity, and Pricing," MPRA Paper 81078, University Library of Munich, Germany.
    4. Yi-Ling Cheng & Shin-Kun Peng, 2014. "Price competition and quality differentiation with multiproduct firms," Journal of Economics, Springer, vol. 112(3), pages 207-223, July.
    5. Christos Bilanakos & John S. Heywood & John Sessions & Nikolaos Theodoropoulos, 2014. "Worker Training and Competing on Product Quality," University of Cyprus Working Papers in Economics 08-2014, University of Cyprus Department of Economics.
    6. Bilanakosa, Christos & Heywood, John S. & Sessions, John & Theodoropoulos, Nikolaos, 2017. "Worker Training and Quality Competition," GLO Discussion Paper Series 137, Global Labor Organization (GLO).
    7. Liao, Hao & Xiao, Rui & Chen, Duanbing & Medo, Matúš & Zhang, Yi-Cheng, 2014. "Firm competition in a probabilistic framework of consumer choice," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 400(C), pages 47-56.

    More about this item

    Keywords

    Oligopoly; Price and quality competition; Quality standards; L13; L15; L50;

    JEL classification:

    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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