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Relative and Absolute Preference for Quality

Author

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  • Angyridis, Constantine
  • Sen, Debapriya

Abstract

This paper seeks to explain two related phenomena: (i) it is often the case that when the new variety of a product is launched, some consumers do not purchase the latest variety and (ii) the quality of the latest variety of a product is often not significantly superior compared to the existing variety. We consider a simple model of monopoly with two types of consumers: "regular" (type R) who cares only about the absolute quality of the product and "fastidious" (type F) who cares about the relative quality vis-a-vis the existing variety. We show that it is never optimal for the monopolist to exclusively serve type F. Moreover, we identify situations where although it is optimal for the monopolist to upgrade the quality of the product, this upgrade is not sufficient to meet the standards of type F. As a result, only type R buys the upgraded variety while type F chooses not to buy it.

Suggested Citation

  • Angyridis, Constantine & Sen, Debapriya, 2010. "Relative and Absolute Preference for Quality," MPRA Paper 23103, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:23103
    as

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    References listed on IDEAS

    as
    1. White, Lawrence J, 1977. "Market Structure and Product Varieties," American Economic Review, American Economic Association, vol. 67(2), pages 179-182, March.
    2. A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 417-429, Autumn.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Relative Preference; Absolute Preference; Singular Menu; Separating Menu;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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