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Does Monopoly Undersupply Product Quality?

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  • L. Lambertini

Abstract

I investigate the behaviour of a multiproduct monopolist supplying vertically differentiated varieties of the same good. The discretemodel adopted here allows to obtain a continuous model when, in the limit, the number of varieties becomes infinitely large. The main finding establishes that the tendency on the part of the monopolist to undersupply all qualities but the top one can take two alternative forms, i.e., either qualities correspond to the socially optimal ones but the allocation of consumers across quali-ties is distorted by the price schedule, or qualities are indeed lower than those supplied under social planning. The first case arises when the monopolist finds it profitable to restrict output, while the second obtains when the market is rich enough to induce the monopolist to supply the same quantity a social planner would produce. Policy implications are discussed.

Suggested Citation

  • L. Lambertini, 1998. "Does Monopoly Undersupply Product Quality?," Working Papers 317, Dipartimento Scienze Economiche, Universita' di Bologna.
  • Handle: RePEc:bol:bodewp:317
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    References listed on IDEAS

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    1. 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.
    2. Donnenfeld, Shabtai & White, Lawrence J, 1988. "Product Variety and the Inefficiency of Monopoly," Economica, London School of Economics and Political Science, vol. 55(219), pages 393-401, August.
    3. Sheshinski, Eytan, 1976. "Price, Quality and Quantity Regulation in Monopoly Situations," Economica, London School of Economics and Political Science, vol. 43(17), pages 127-137, May.
    4. Jaskold Gabszewicz, Jean & Shaked, Avner & Sutton, John & Thisse, Jacques-Francois, 1986. "Segmenting the market: The monopolist's optimal product mix," Journal of Economic Theory, Elsevier, vol. 39(2), pages 273-289, August.
    5. de Meza, David, 1997. "Product Diversity under Monopoly: Two High Quality Results," Bulletin of Economic Research, Wiley Blackwell, vol. 49(2), pages 169-171, April.
    6. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
    7. 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 411-429, June.
    8. A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 417-429, Autumn.
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    Cited by:

    1. Nogueira, Lia & Baylis, Katherine R., 2004. "Product Quality In The Canadian Dairy Industry," Working Papers 15844, University of British Columbia, Food and Resource Economics.

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