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Quality Improvement to Meet Competitive Fringe

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  • Noriaki Matsushima
  • Ren-Jye Liu

Abstract

We investigate what kind of competitive pressure induces existing firms to engage in more intensive innovation activities. We examine two types of competitive pressure: a price decrease in competitive fringe firms and a quality improvement therein. We use an oligopoly model with vertical differentiation to investigate this question. We show that a decrease in the exogenous price of competitive firms induces the two existent leading firms (one high-quality firm and one mid-quality firm) to engage in quality investments more if the ex ante quality level of the high quality product is large enough; otherwise, only the mid-quality firm engages more in quality investment. We also show that an increase in the exogenous quality level of competitive firms diminishes the incentive of the mid-quality firm to engage in quality investments.

Suggested Citation

  • Noriaki Matsushima & Ren-Jye Liu, 2012. "Quality Improvement to Meet Competitive Fringe," ISER Discussion Paper 0854, Institute of Social and Economic Research, Osaka University.
  • Handle: RePEc:dpr:wpaper:0854
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    File URL: http://www.iser.osaka-u.ac.jp/library/dp/2012/DP0854.pdf
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    1. Barros, Pedro P & Nilssen, Tore, 1999. " Industrial Policy and Firm Heterogeneity," Scandinavian Journal of Economics, Wiley Blackwell, vol. 101(4), pages 597-616, December.
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