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Price and Quality Competition

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  • Chioveanu, Ioana

Abstract

This study considers an oligopoly model with simultaneous price and quality choice. Ex-ante homogeneous sellers compete by offering products at one of two quality levels. The consumers have heterogeneous tastes for quality: for some consumers it is efficient to buy a high quality product, while for others it is efficient to buy a low quality product. In the symmetric equilibrium firms use mixed strategies that randomize both price and quality, and obtain strictly positive profits. This framework highlights trade-offs which determine the impact of consumer protection policy in the form of quality standards.

Suggested Citation

  • Chioveanu, Ioana, 2009. "Price and Quality Competition," MPRA Paper 21647, University Library of Munich, Germany, revised 01 Feb 2010.
  • Handle: RePEc:pra:mprapa:21647
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    File URL: https://mpra.ub.uni-muenchen.de/21647/1/MPRA_paper_21647.pdf
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    References listed on IDEAS

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    1. Mark Armstrong & Yongmin Chen, 2009. "Inattentive Consumers and Product Quality," Journal of the European Economic Association, MIT Press, vol. 7(2-3), pages 411-422, 04-05.
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    7. Koji Ishibashi, 2001. "Strategic delegation under quality competition," Journal of Economics, Springer, vol. 73(1), pages 25-56, February.
    8. Leland, Hayne E, 1979. "Quacks, Lemons, and Licensing: A Theory of Minimum Quality Standards," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1328-1346, December.
    9. Mark Armstrong, 2008. "Interactions between Competition and Consumer Policy," CPI Journal, Competition Policy International, vol. 4.
    10. Valletti, Tommaso M, 2000. "Minimum Quality Standards under Cournot Competition," Journal of Regulatory Economics, Springer, vol. 18(3), pages 235-245, November.
    11. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, September.
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    13. Rosenthal, Robert W, 1980. "A Model in Which an Increase in the Number of Sellers Leads to a Higher Price," Econometrica, Econometric Society, vol. 48(6), pages 1575-1579, September.
    14. Uri Ronnen, 1991. "Minimum Quality Standards, Fixed Costs, and Competition," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 490-504, Winter.
    15. Asher Wolinsky, 1983. "Prices as Signals of Product Quality," Review of Economic Studies, Oxford University Press, vol. 50(4), pages 647-658.
    16. Besanko, David & Donnenfeld, Shabtai & White, Lawrence J, 1988. "The Multiproduct Firm, Quality Choice, and Regulation," Journal of Industrial Economics, Wiley Blackwell, vol. 36(4), pages 411-429, June.
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    Cited by:

    1. Chioveanu, Ioana, 2019. "Prominence, complexity, and pricing," International Journal of Industrial Organization, Elsevier, vol. 63(C), pages 551-582.
    2. Sandro Shelegia & Chris M Wilson, 2014. "A Utility-Based Model of Sales with Informative Advertising," Discussion Paper Series 2014_09, Department of Economics, Loughborough University, revised Oct 2014.
    3. Karbowski, Adam, 2019. "Cooperative and non-cooperative R&D in product innovation and firm performance," EconStor Open Access Articles, ZBW - Leibniz Information Centre for Economics, pages 1121-1142.
    4. Alexander Karpov, 2016. "Health care inequality, patient mobility and welfare," Economics Bulletin, AccessEcon, vol. 36(2), pages 1000-1009.
    5. Bilanakos, Christos & Heywood, John S. & Sessions, John & Theodoropoulos, Nikolaos, 2018. "Does demand for product quality increase worker training?," Journal of Economic Behavior & Organization, Elsevier, vol. 155(C), pages 159-177.
    6. Yi-Ling Cheng & Shin-Kun Peng, 2014. "Price competition and quality differentiation with multiproduct firms," Journal of Economics, Springer, vol. 112(3), pages 207-223, July.
    7. Christos Bilanakos & John S. Heywood & John Sessions & Nikolaos Theodoropoulos, 2014. "Worker Training and Competing on Product Quality," University of Cyprus Working Papers in Economics 08-2014, University of Cyprus Department of Economics.
    8. Bilanakosa, Christos & Heywood, John S. & Sessions, John & Theodoropoulos, Nikolaos, 2017. "Worker Training and Quality Competition," GLO Discussion Paper Series 137, Global Labor Organization (GLO).
    9. Liao, Hao & Xiao, Rui & Chen, Duanbing & Medo, Matúš & Zhang, Yi-Cheng, 2014. "Firm competition in a probabilistic framework of consumer choice," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 400(C), pages 47-56.

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    More about this item

    Keywords

    Oligopoly; Price and quality competition; Quality standards;
    All these keywords.

    JEL classification:

    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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