Regulating Quality by Regulating Quantity: A Case against Minimum Quality Standards

We show in a simple model of entry with sunk cost, that a regulator prefers limiting the output, or capacity, of the incumbent firm rather than imposing a "Minimum Quality Standard" in order to help the entrant to provide high quality. As a by-product, our analysis makes a contribution to the study of Bertrand-Edgeworth competition in a market with differentiated products.

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