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On the Regulation of A Vertically Differentiated Market Through Taxation/Subsidization of Product Quality

  • L. Lambertini
  • M. Mosca

The aim of this paper is to investigate a vertically differentiated market served either by a multiproduct monopolist or by duopolists, in which a public authority aiming at increasing the welfare level can choose among two instruments, namely, quality taxation/subsidization, and minimum quality standard. In the monopoly case they are equivalent as to the social welfare level, in that both allow the regulator to achieve the second best level of social welfare he would attain if he were to set qualities under the monopoly pricing rule, while they are not equivalent in terms of the distribution of surplus. In the duopoly regime, we show that there exists a taxation/subsidization scheme inducing firms to produce the socially optimal qualities.

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Paper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number 247.

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Date of creation: Feb 1996
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Handle: RePEc:bol:bodewp:247
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  1. G. Ecchia & L. Lambertini, 1995. "Minimum Quality Standards and Collusion," Working Papers 235, Dipartimento Scienze Economiche, Universita' di Bologna.
  2. David Besanko & Shabtai Donnenfeld & Lawrence J. White, 1987. "Monopoly and Quality Distortion: Effects and Remedies," The Quarterly Journal of Economics, Oxford University Press, vol. 102(4), pages 743-767.
  3. Besanko, David & Donnenfeld, Shabtai & White, Lawrence J, 1988. "The Multiproduct Firm, Quality Choice, and Regulation," Journal of Industrial Economics, Wiley Blackwell, vol. 36(4), pages 411-29, June.
  4. Robert B. Ekelund, 1970. "Price Discrimination and Product Differentiation in Economic Theory: An Early Analysis," The Quarterly Journal of Economics, Oxford University Press, vol. 84(2), pages 268-278.
  5. Baumol, William J & Bradford, David F, 1970. "Optimal Departures from Marginal Cost Pricing," American Economic Review, American Economic Association, vol. 60(3), pages 265-83, June.
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