Quality Improvement to Meet Competitive Fringe

Noriaki Matsushima and Ren-Jye Liu

ISER Discussion Paper from Institute of Social and Economic Research, The University of Osaka

Abstract: We investigate what kind of competitive pressure induces existing firms to engage in more intensive innovation activities. We examine two types of competitive pressure: a price decrease in competitive fringe firms and a quality improvement therein. We use an oligopoly model with vertical differentiation to investigate this question. We show that a decrease in the exogenous price of competitive firms induces the two existent leading firms (one high-quality firm and one mid-quality firm) to engage in quality investments more if the ex ante quality level of the high quality product is large enough; otherwise, only the mid-quality firm engages more in quality investment. We also show that an increase in the exogenous quality level of competitive firms diminishes the incentive of the mid-quality firm to engage in quality investments.

Date: 2012-08
New Economics Papers: this item is included in nep-com and nep-ino
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Persistent link: https://EconPapers.repec.org/RePEc:dpr:wpaper:0854

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