 Better product at same cost, lower sales and lower welfareDavid J. Balan and George Deltas () International Journal of Industrial Organization, 2013, vol. 31, issue 4, 322-330 Abstract: We consider a high-quality dominant firm facing a low-quality competitive fringe. We show that the dominant firm's quantity is (weakly) increasing in its quality if and only if its marginal cost (weakly) exceeds that of the fringe; otherwise it is strictly decreasing in quality. This result is driven by the fact that a quality increase causes the marginal revenue curve to rotate clockwise, rather than shift outwards, and at a height equal to the fringe firms' marginal cost. This fact, combined with the dominant firm's MR=MC condition, determines the result. For closely related reasons, the effect of a quality increase on consumer welfare also depends on the relationship between the costs. It is possible that all consumers are (weakly) better off, that some are better off and some worse off, or that all are (weakly) worse off. We also consider several extensions and variations of the model. Keywords: Product innovation; Vertical differentiation; Dominant firm; Competitive fringe (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:indorg:v:31:y:2013:i:4:p:322-330 DOI: 10.1016/j.ijindorg.2013.04.004 Access Statistics for this article International Journal of Industrial Organization is currently edited by P. Bajari, B. Caillaud and N. Gandal More articles in International Journal of Industrial Organization from Elsevier |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.