Quality Competition and Social Welfare in Markets with Partial Coverage: New Results

We use a vertical product differentiation model under partial market coverage to study the social welfare optimum and duopoly equilibrium when convex costs of quality provision are either fixed or variable in terms of production. We show the following new results. First, under fixed costs, the social planner charges a uniform price for the single variant that just covers costs of quality provision. Like the duopoly equilibrium, this socially optimal pricing entails a partially uncovered market, but a smaller share of the market is served compared with the duopoly equilibrium. Second, for the variable cost case, it is socially optimal to provide both high- and low-quality variants, but market shares need not be equal. This differs from the result in fully covered markets. Third, in the duopoly equilibrium, the quality spread is too wide under variable costs relative to the social optimum. Under fixed costs, the duopoly produces two variants, but quality is too low relative to the social optimum, which has only one variant.

[1]  O. Rantala.  Tuotekehitys, toimialojen panos-tuotosrakenteen muutokset ja talouden kasvu , 2003 .

[2]  K. Alho.  Stabilization Inside and Outside EMU , 2002 .

[3]  Jukka Jalava,et al.  The Production and Use of ICT in Finland , 2002 .

[4]  R. Hoffmann,et al.  Quality policy, market structure and investment behavior in the food marketing chain , 2006 .

[5]  Lotta Väänänen,et al.  Government Funding of Small and Medium-sized Enterprises in Finland , 2002 .

[6]  Padmanabhan Srinagesh,et al.  QUALITY DISTORSION BY A DISCRIMINATING MONOPOLIST , 1988 .

[7]  K. Alho,et al.  The Impact of Regionalism on Trade in Europe , 2003 .

[8]  Mika Widgrén,et al.  EU-enlargement and the Opening of Russia: Lessons from the GTAP Reference Model , 2003 .

[9]  Luca Lambertini,et al.  CHOOSING ROLES IN A DUOPOLY FOR ENDOGENOUSLY DIFFERENTIATED PRODUCTS , 1996 .

[10]  Xavier Wauthy,et al.  Quality choice in models of vertical differentiation , 1996 .

[11]  L. Lambertini,et al.  On the Regulation of A Vertically Differentiated Market Through Taxation/Subsidization of Product Quality , 1996 .

[12]  Jacques-François Thisse,et al.  On the taxation of polluting products in a differentiated industry , 1999 .

[13]  R. Acharyya,et al.  Monopoly and product quality: Separating or pooling menu? , 1998 .

[14]  A. Shaked,et al.  Relaxing price competition through product differentiation , 1982 .

[15]  Price-cost margin in the pharmaceutical industry , 2004, The European Journal of Health Economics, formerly: HEPAC.

[16]  Erkki Koskela,et al.  Environmental quality competition and eco-labeling , 2004 .

[17]  S. Rosen,et al.  Monopoly and product quality , 1978 .

[18]  Lotta Väänänen.  Public Provision of Business Support Services in Finland , 2003 .

[19]  Luis H. R. Alvarez,et al.  On Forest Rotation under Interest Rate Variability , 2003 .

[20]  Juha A. Alho,et al.  The population of Finland in 2050 and beyond , 2002 .

[21]  Tomi Hussi,et al.  Reconfiguring knowledge management - combining intellectual capital, intangible assets and knowledge creation , 2004, J. Knowl. Manag..

[22]  Laura Paija,et al.  Distribution of Intellectual Property Rights and the Development of Technology Suppliers , 2003 .

[23]  Kari Alho,et al.  The Equilibrium Rate of Unemployment and Policies to Lower It: The Case of Finland , 2002 .

[24]  Marianne Paasi,et al.  Economics of collective benchmarking: Learning in research and innovation policy , 2002 .

[25]  Russell Cooper,et al.  On Allocative Distortions in Problems of Self-Selection , 1984 .

[26]  Massimo Motta,et al.  Endogenous Quality Choice: Price vs. Quantity Competition , 1993 .

[27]  Pekka Mannonen.  The strategic response of banks to an exogenous positive information shock in the credit markets , 2002 .

[28]  L. Lambertini,et al.  On the Regulation of Vertically Differentiated Markets Through Minimum Quality Standards , 2001 .

[29]  George Hendrikse,et al.  The Theory of Industrial Organization , 1989 .

[30]  Tomi Hussi,et al.  RECONFIGURING KNOWLEDGE MANAGEMENT , 2003 .

[31]  Abraham Hollander,et al.  Duopoly and quality standards , 1991 .

[32]  Lawrence J. White,et al.  Quality Distortion by a Discriminating Monopolist: Comment , 1990 .

[33]  Ulrich Lehmann-Grube,et al.  Strategic Choice of Quality When Quality is Costly: The Persistence of the High-Quality Advantage , 1997 .

[34]  Luis H. R. Alvarez,et al.  Irreversible Investment under Interest Rate Variability: Some Generalizations , 2006 .