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Price versus Quantity: Market Clearing Mechanisms When Sellers Differ in Quality

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  • Andrew Metrick
  • Richard Zeckhauser

Abstract

High-quality producers in a vertically differentiated market can reap superior profits by charging higher prices, selling greater quantities, or both. If qualities are known by consumers and production costs are constant, then having a higher quality secures the producer both higher price and higher quantity; if marginal costs are rising, having a higher quality assures only higher price. If only some consumers can discern quality but others cannot, then high- and low-quality producers may set a common price, but the high-quality producer will sell more. In this context, quality begets quantity. Empirical analyses suggest that in both the mutual fund and automobile industries, high-quality producers sell more units than their low-quality competitors, but at no higher price (or markup) per unit.

Suggested Citation

  • Andrew Metrick & Richard Zeckhauser, 1996. "Price versus Quantity: Market Clearing Mechanisms When Sellers Differ in Quality," NBER Working Papers 5728, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:5728
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    Cited by:

    1. MAXIMLaura DIACONU & MAXIM Andrei, 2018. "The Consumption Behavior After 2008-2009 Crisis. Evidence From Romania," Revista Economica, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 70(3), pages 65-78, August.
    2. Richardson, G., 2000. "Brand Names Before the Industrial Revolution," Papers 00-01-09, California Irvine - School of Social Sciences.
    3. Klette, Tor Jakob & Griliches, Zvi, 2000. "Empirical Patterns of Firm Growth and R&D Investment: A Quality Ladder Model Interpretation," Economic Journal, Royal Economic Society, vol. 110(463), pages 363-387, April.
    4. Gil-Bazo, Javier & Ruiz-Verdú, Pablo, 2008. "When cheaper is better: Fee determination in the market for equity mutual funds," Journal of Economic Behavior & Organization, Elsevier, vol. 67(3-4), pages 871-885, September.

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    More about this item

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment; Related Parts and Equipment

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