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When does Variety increase with Quality?

Author

Listed:
  • Suren Basov

    (Department of Economics and Finance, La Trobe University)

  • Svetlana Danilkina

    (The University of Melbourne)

  • David Prentice

    (Department of Economics and Finance, La Trobe University)

Abstract

Casual empiricism suggests higher quality is associated with greater variety. However, recent theoretical and empirical research has either not considered this link, or has been unable to establish unambiguous predictions about the relationship between quality and variety. In this paper we develop a simple model which predicts that for low qualities variety should be positively correlated with quality and we establish conditions under which variety will either increase or decrease with quality at higher quality levels. The monopolist uses variety to increase the profitability of price discrimination across product lines of different qualities, by increasing the likelihood consumers choose high price products among products yielding the same utility. We show that the number of varieties offered by the monopolist is greater than the social optimum. The predictions of the model are supported by an analysis of the market for cars. A wide range of car manufacturers are found to offer a hump-shaped distribution of varieties.

Suggested Citation

  • Suren Basov & Svetlana Danilkina & David Prentice, 2008. "When does Variety increase with Quality?," Working Papers 2008.04, School of Economics, La Trobe University.
    • Handle: RePEc:ltr:wpaper:2008.04
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    File URL: http://www.latrobe.edu.au/__data/assets/pdf_file/0014/130910/2008.04.pdf
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    Keywords

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    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment; Related Parts and Equipment

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