Vertical Product Differentiation When Quality is Unobservable to Buyers

We analyze vertical product differentiation in a model where a good’s quality is unobservable to buyers before purchase, a continuum of quality levels is technologically feasible, and minimum quality is supplied under competitive conditions. After purchase the true quality of the good is revealed with positive probability. To provide firms with incentives to actually deliver promised quality, prices must exceed marginal cost. We derive sufficient conditions for these incentive constraints to determine equilibrium prices, and show that under certain conditions only one or both of the extreme levels of quality, minimum and maximum quality, are available in the market.

[1]  Jakob de Haan,et al.  Look Who's Talking: ECB Communication During the First Years of Emu , 2004, SSRN Electronic Journal.

[2]  Andreas Wagener,et al.  Why is the public sector more labor-intensive? A distortionary tax argument , 2004, SSRN Electronic Journal.

[3]  A. Wagener,et al.  THE INVISIBLE HAND PLAYS DICE , 2004 .

[4]  Wolfgang Leininger,et al.  Fending Off One Means Fending Off All: Evolutionary Stability in Submodular Games , 2004, SSRN Electronic Journal.

[5]  G. Tabellini,et al.  The Role of the State in Economic Development , 2004, SSRN Electronic Journal.

[6]  Ngo Van Long,et al.  Insecure property rights and growth: the role of appropriation costs, wealth effects, and heterogeneity , 2004, SSRN Electronic Journal.

[7]  Andrew P. Meyer,et al.  That Elusive Elasticity: A Long-Panel Approach to Estimating the Capital-Labor Substitution Elasticity , 2004, SSRN Electronic Journal.

[8]  Michael H. Riordan,et al.  Monopolistic Competition with Experience Goods , 1986 .

[9]  Rainer Niemann.  Asymmetric Taxation and Cross-Border Investment Decisions , 2004, SSRN Electronic Journal.

[10]  H. Vollebergh,et al.  Tax Competition Under Minimum Rates: The Case of European Diesel Excises , 2004, SSRN Electronic Journal.

[11]  Jacques-François Thisse,et al.  Price competition, quality and income disparities , 1979 .

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

[13]  B. Klein,et al.  The Role of Market Forces in Assuring Contractual Performance , 1981, Journal of Political Economy.

[14]  B. Holmlund.  Sickness Absence and Search Unemployment , 2004, SSRN Electronic Journal.

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

[16]  Harris Schlesinger,et al.  Adverse Selection in an Insurance Market with Government-Guaranteed Subsistence Levels , 2004, SSRN Electronic Journal.

[17]  Paolo M. Panteghini,et al.  Wide vs. Narrow Tax Bases Under Optimal Investment Timing , 2004, SSRN Electronic Journal.

[18]  Helmut Bester,et al.  Quality Uncertainty Mitigates Product Differentiation , 1998 .

[19]  A. Wolinsky.  Prices as Signals of Product Quality , 1983 .

[20]  K. Bagwell,et al.  High and Declining Prices Signal Product Quality , 1991 .

[21]  C. Shapiro.  Premiums for High Quality Products as Returns to Reputations , 1983 .

[22]  Wolfgang Ochel,et al.  Welfare Time Limits in the United States - Experiences with a New Welfare-to-Work Approach , 2004, SSRN Electronic Journal.

[23]  Jacques-François Thisse,et al.  Entry (and exit) in a differentiated industry , 1980 .

[24]  Davide Pettenuzzo,et al.  Forecasting Time Series Subject to Multiple Structural Breaks , 2004, SSRN Electronic Journal.

[25]  S. Blomberg,et al.  How Much Does Violence Tax Trade? , 2004, The Review of Economics and Statistics.

[26]  A. Woodland,et al.  Measuring Tax Efficiency: A Tax Optimality Index , 2004, SSRN Electronic Journal.

[27]  Y. Cheung,et al.  An Output Perspective on a Northeast Asia Currency Union , 2004, SSRN Electronic Journal.

[28]  K. Bagwell.  Informational product differentiation as a barrier to entry , 1990 .

[29]  Esther Gal-Or,et al.  Quality and Quantity Competition , 1983 .

[30]  S. Holden,et al.  WAGE FORMATION UNDER LOW INFLATION , 2004 .

[31]  Thomas A. E. Fuchs,et al.  What accounts for international differences in student performance? A re-examination using PISA data , 2004, SSRN Electronic Journal.

[32]  M. Werding,et al.  Time Limits on Welfare Use Under Involuntary Unemployment , 2004, SSRN Electronic Journal.

[33]  P. Nelson.  Information and Consumer Behavior , 1970, Journal of Political Economy.

[34]  Rafael Repullo,et al.  Capital Requirements, Market Power and Risk-Taking in Banking , 2003 .

[35]  Bart Cockx,et al.  The Exhaustion of Unemployment Benefits in Belgium: Does it Enhance the Probability of Employment? , 2004 .

[36]  Armin Falk,et al.  Charitable Giving as a Gift Exchange Evidence from a Field Experiment , 2003, SSRN Electronic Journal.

[37]  Alfons J. Weichenrieder,et al.  On the Economics of Bottle Deposits , 2004, SSRN Electronic Journal.

[38]  D. Bradford,et al.  The X Tax in the World Economy , 2004 .

[39]  Martin Peitz,et al.  Selling Reputation When Going Out of Business , 2004, SSRN Electronic Journal.

[40]  William P. Rogerson,et al.  Price Advertising and the Deterioration of Product Quality , 1988 .

[41]  Thomas F. Hellmann,et al.  Liberalization, Moral Hazard in Banking and Prudential Regulation: Are Capital Requirements Enough? , 1997 .

[42]  Jeremy Edwards,et al.  How Weak is the Weakest-Link Principle? On the Measurement of Firm Owners' Control Rights , 2004, SSRN Electronic Journal.

[43]  Ngo Van Long,et al.  International Trade and Cultural Diversity: A Model of Preference Selection , 2004, SSRN Electronic Journal.

[44]  J. Gabszewicz,et al.  Price competition when consumers are uncertain about which firm sells which quality , 1992 .

[45]  Quality underprovision by a monopolist when quality is not costly , 2002 .

[46]  Frank Heinemann,et al.  Multiple But Asymmetric Bank Financing: The Case of Relationship Lending , 2004, SSRN Electronic Journal.

[47]  Frederick van der Ploeg,et al.  The Welfare State, Redistribution and the Economy, Reciprocal Altruism, Consumer Rivalry and Second Best , 2004 .

[48]  Stefan Homburg.  A New Approach to Optimal Commodity Taxation , 2004, SSRN Electronic Journal.

[49]  R. Schmalensee.  Product Differentiation Advantages of Pioneering Brands , 1980 .