Market Provision of Quality: Impact of Economic Growth

Over the past three decades, the world has witnessed economic growth accompanied by widening of income inequalities. In the face of rising income inequalities, it becomes imperative to ask what happens to the quality of various products provided in the market when economies experience economic growth. Would economic growth necessarily lead to improvement in quality of products for all income groups? Using a vertically di?erentiated product model, the paper aims to investigate the e?ects of economic growth on market provision of product quality. The quality attribute considered is environmental-friendliness of products. It shows that a uniform growth in income among all consumers improves the cleanup levels adopted by both ?rms. However, a heterogeneous growth in income may result in lowering of one of the two qualities. More speci?cally, if the growth in income is limited to the rich consumers (who are more likely to gain from economic growth), the quality of the (environmentally) inferior variant is reduced. This has serious implications for the poor consumers if the product has safety or health hazards. The paper suggests a regulatory measure to prevent such deterioration in the quality of the inferior variant.