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Product Varieties in a Quality-Differentiated Goods Monopoly

Author

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  • Changying Li
  • Jianhu Zhang

Abstract

This paper analyzes market versus optimal product varieties in a vertically differentiated goods monopoly. Four results are obtained. First, compared to the first- or second-best optimum, product varieties are always undersupplied by a monopolist. Second, the quality range under a monopoly is smaller than that under the first- or second-best optimum. Third, the monopolist distorts the lowest quality upward while distorting the highest quality downward. Finally, a fixed-cost subsidy can lead to a second-best outcome where a social planner determines the number of product varieties and the corresponding qualities, and the monopolist decides the prices.

Suggested Citation

  • Changying Li & Jianhu Zhang, 2019. "Product Varieties in a Quality-Differentiated Goods Monopoly," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 175(3), pages 524-536.
    • Handle: RePEc:mhr:jinste:urn:doi:10.1628/jite-2018-0014
    DOI: 10.1628/jite-2018-0014
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    More about this item

    Keywords

    monopoly; product varieties; quality distortion; variable-cost (fixed-cost) subsidy; first-best (second-best) optimum;
    All these keywords.

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods

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