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A New Model of Quality

Author

Listed:
  • Kala Krishna
  • Tor Winston

Abstract

We develop a new model of quality to capture the idea that even if a customer chooses to purchase a product, it may fail to deliver.' In this event, the customer may wish to choose some other product. We model this as a two stage game where firms first choose quality and then price. We find that in equilibrium, the high quality firm (the one with a higher probability of being able to deliver') will always make higher profits than the low quality one even if costs of quality are sharply increasing. Our work thus provides a reason for high quality niches to be inherently more profitable. The implications for welfare and equilibrium under free entry are also studied.

Suggested Citation

  • Kala Krishna & Tor Winston, 1998. "A New Model of Quality," NBER Working Papers 6580, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:6580
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    References listed on IDEAS

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    1. repec:bla:econom:v:43:y:1976:i:17:p:127-37 is not listed on IDEAS
    2. Avner Shaked & John Sutton, 1982. "Relaxing Price Competition Through Product Differentiation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 49(1), pages 3-13.
    3. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
    4. Shaked, Avner & Sutton, John, 1983. "Natural Oligopolies," Econometrica, Econometric Society, vol. 51(5), pages 1469-1483, September.
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    Cited by:

    1. Kala Krishna & Tor Winston, 2003. "If at First You Don't Succeed: Profits, Prices, and Market Structure in a Model of Quality with Unknowable Consumer Heterogeneity," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 573-597, May.
    2. GRILO, Isabel & WAUTHY, Xavier, 2000. "Price competition when product quality is uncertain," LIDAM Reprints CORE 1509, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

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    More about this item

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D6 - Microeconomics - - Welfare Economics

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