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Does Monopoly Undersupply Product Quality?

  • L. Lambertini

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.

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Paper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number 317.

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Date of creation: Apr 1998
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Handle: RePEc:bol:bodewp:317
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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. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, 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 127-37, May.
  4. de Meza, David, 1997. "Product Diversity under Monopoly: Two High Quality Results," Bulletin of Economic Research, Wiley Blackwell, vol. 49(2), pages 169-71, April.
  5. 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.
  6. 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.
  7. 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.
  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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