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An Undergraduate Primer on Quality-Differentiated Demand

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  • Charles F. Adams

Abstract

This article presents a student exercise on the logic underlying demand for quality-differentiated products. The argument builds and extends on basic constructs from undergraduate microeconomics, developing a linear demand structure to reflect consumer preferences for quality variation and a brief critique of market responses to those preferences that indicates potentially greater efficiency loses under monopoly once the possibility of quality distortions are accounted for. Various policy extensions are noted. These include applications in utility pricing tied to quality variations in service reliability, the potentially disproportionate impact on lower income households of quality distortions created by monopoly practices, and the potential of profligate resource use by monopolies which are shown to favor higher over lower quality products. Following along with the student exercise is a series of instructor notes with references to the scholarly literature and possible elaborations on various aspects of the exercise that instructors may chose to address. JEL Classifications : D4, D41, D42

Suggested Citation

  • Charles F. Adams, 2020. "An Undergraduate Primer on Quality-Differentiated Demand," The American Economist, Sage Publications, vol. 65(2), pages 277-283, October.
    • Handle: RePEc:sae:amerec:v:65:y:2020:i:2:p:277-283
    DOI: 10.1177/0569434519899354
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    References listed on IDEAS

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    1. G. Warren Nutter, 1955. "The Plateau Demand Curve and Utility Theory," Journal of Political Economy, University of Chicago Press, vol. 63, pages 525-525.
    2. Dos Santos Ferreira, Rodolphe & Thisse, Jacques-Francois, 1996. "Horizontal and vertical differentiation: The Launhardt model," International Journal of Industrial Organization, Elsevier, vol. 14(4), pages 485-506, June.
    3. Charles F. Adams, 2019. "A Note on Pricing With Market Power: Third-Degree Price Discrimination With Quality-Differentiated Demand," The American Economist, Sage Publications, vol. 64(2), pages 183-187, October.
    4. Deaton,Angus & Muellbauer,John, 1980. "Economics and Consumer Behavior," Cambridge Books, Cambridge University Press, number 9780521296762.
    5. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
    6. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
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    Cited by:

    1. Charles F. Adams, 2022. "Too Much of a Good Thing: Quality-Differentiated Demand and Monopoly Bias," The American Economist, Sage Publications, vol. 67(1), pages 123-131, March.
    2. Charles F. Adams, 2021. "Quality-Differentiated Demand and the Analytics of Disruption," The American Economist, Sage Publications, vol. 66(2), pages 315-322, October.

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    More about this item

    Keywords

    quality differentiation; competition; monopoly;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly

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