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Product Quality and Market Size

  • Steven Berry
  • Joel Waldfogel

Recent literature notes that when quality is produced with fixed costs, a high quality firm can undercut its rival's prices and may find it profitable to invest more in quality as market size grows large. As a result, a market can remain concentrated even as it grows large. When quality is produced with variable costs, by contrast, a wide range of product qualities can coexist in the market because they are offered at different prices. Larger markets will fragment and offer products with a wider range of qualities. Using US urban areas as markets, we examine the relationships between market size and product quality - and between market size and product concentration - for two industries that differ in their quality production process. We document that in the restaurants industry, where quality is produced largely with variable costs, the range of qualities on offer increases in market size, with each product maintaining a small market share. In daily newspapers, where quality is produced with fixed costs, the average quality of products increases with market size, and the market does not fragment as it grows large.

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File URL: http://www.nber.org/papers/w9675.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9675.

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Date of creation: May 2003
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Publication status: published as Steven Berry & Joel Waldfogel, 2010. "PRODUCT QUALITY AND MARKET SIZE -super-* ," Journal of Industrial Economics, Blackwell Publishing, vol. 58(1), pages 1-31, 03.
Handle: RePEc:nbr:nberwo:9675
Note: IO PR
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  1. Lisa George & Joel Waldfogel, 2000. "Who Benefits Whom in Daily Newspaper Markets?," NBER Working Papers 7944, National Bureau of Economic Research, Inc.
  2. Edward L. Glaeser, Jed Kolko, and Albert Saiz, 2001. "Consumer city," Journal of Economic Geography, Oxford University Press, vol. 1(1), pages 27-50, January.
  3. Thomas J Holmes, 2002. "The Role of Cities: Evidence From the Placement of Sales Offices," Working Papers 02-02, Center for Economic Studies, U.S. Census Bureau.
  4. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-99, June.
  5. Jeffrey R. Campbell & Hugo A. Hopenhayn, 2005. "Market Size Matters," Journal of Industrial Economics, Wiley Blackwell, vol. 53(1), pages 1-25, 03.
  6. Shaked, Avner & Sutton, John, 1987. "Product Differentiation and Industrial Structure," Journal of Industrial Economics, Wiley Blackwell, vol. 36(2), pages 131-46, December.
  7. Gyourko, Joseph & Tracy, Joseph, 1991. "The Structure of Local Public Finance and the Quality of Life," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 774-806, August.
  8. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  9. Todd Sinai & Joel Waldfogel, 2003. "Geography and the Internet: Is the Internet a Substitute or a Complement for Cities?," NBER Working Papers 10028, National Bureau of Economic Research, Inc.
  10. Masahisa Fujita & Paul Krugman & Anthony J. Venables, 2001. "The Spatial Economy: Cities, Regions, and International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262561476, June.
  11. Bresnahan, Timothy F & Reiss, Peter C, 1991. "Entry and Competition in Concentrated Markets," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 977-1009, October.
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