Producers bargaining over a quality standard
We study an asymmetric information model in which two firms are active on a market where buyers only observe the average quality supplied. Quantities and cost structures are exogenously given and firms compete in quality. Before choosing their qualities, they bargain over a perfectly enforcable minimum quality standard. The bargaining outcome is given by the Kalai-Smorodinsky (KS) solution. Agreement on a binding standard is possible only if the firms are sufficiently similar with respect to their production costs. The agreed-upon standard always falls short of the joint-profit-maximizing (or, for that matter, the efficient) level. It is decreasing in the high-cost producer's cost of production. Yet, it first increases then decreases with the low-cost producer's cost of production, showing that the latter's bargaining position can be enhanced by seemingly adverse cost changes.
|Date of creation:||30 Dec 2005|
|Date of revision:||18 Jan 2006|
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- Crampes, C. & Hollander, A., 1991.
"Duopoly and Quality Standards,"
Cahiers de recherche
9128, Universite de Montreal, Departement de sciences economiques.
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"Subgame-perfect implementation of bargaining solutions,"
Games and Economic Behavior,
Elsevier, vol. 41(2), pages 292-308, November.
- Eiichi Miyagawa, 2002. "Subgame-perfect implementation of bargaining solutions," Discussion Papers 0102-16, Columbia University, Department of Economics.
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- Scarpa, Carlo, 1998. "Minimum quality standards with more than two firms1," International Journal of Industrial Organization, Elsevier, vol. 16(5), pages 665-676, September.
- Josh Lerner & Jean Tirole, 2004. "A Model of Forum Shopping, with Special Reference to Standard Setting Organizations," NBER Working Papers 10664, National Bureau of Economic Research, Inc.
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