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Quality differentiation if market share matters

Author

Listed:
  • Ellert, Alexander
  • Urmann, Oliver

Abstract

Using a vertical differentiation model, we investigate the product quality strategies of two competing firms maximizing market shares. The firms are facing variable costs of quality improvement and choose their prices under the constraint of nonnegative profits. We show that in equilibrium there is no differentiation in quality if the market coverage is either increasing or decreasing and concave in quality. Otherwise the existence of an equilibrium depends on the structure of the game. If the firms choose their qualities simultaneously there is no equilibrium, while there is an equilibrium with a first mover advantage and quality differentiation in the sequential quality competition.

Suggested Citation

  • Ellert, Alexander & Urmann, Oliver, 2010. "Quality differentiation if market share matters," Working Papers on Risk and Insurance 25, University of Hamburg, Institute for Risk and Insurance.
  • Handle: RePEc:zbw:hzvwps:25
    as

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    References listed on IDEAS

    as
    1. Richard Steinberg, 1986. "The Revealed Objective Functions of Nonprofit Firms," RAND Journal of Economics, The RAND Corporation, pages 508-526.
    2. Kevin Roberts, 2005. "Social Choice Theory and the Informational Basis Approach," Economics Papers 2005-W23, Economics Group, Nuffield College, University of Oxford.
    3. Jaskold Gabszewicz, J. & Thisse, J. -F., 1979. "Price competition, quality and income disparities," Journal of Economic Theory, Elsevier, pages 340-359.
    4. Boom, Anette, 1995. "Asymmetric International Minimum Quality Standards and Vertical Differentiation," Journal of Industrial Economics, Wiley Blackwell, vol. 43(1), pages 101-119, March.
    5. Jensen, Michael C., 2002. "Value Maximization, Stakeholder Theory, and the Corporate Objective Function," Business Ethics Quarterly, Cambridge University Press, pages 235-256.
    6. Jaskold Gabszewicz, J. & Thisse, J. -F., 1979. "Price competition, quality and income disparities," Journal of Economic Theory, Elsevier, pages 340-359.
    7. Ritz, Robert A., 2008. "Strategic incentives for market share," International Journal of Industrial Organization, Elsevier, pages 586-597.
    8. Aoki, Reiko & Prusa, Thomas J., 1997. "Sequential versus simultaneous choice with endogenous quality," International Journal of Industrial Organization, Elsevier, pages 103-121.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Market share maximiziation; Vertical differentiation; Health care market;

    JEL classification:

    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets

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