Quality Competition and a Demand Spillover Effect: A Case of Product Differentiated Duopoly

Tsuyoshi Toshimitsu

No 89, Discussion Paper Series from School of Economics, Kwansei Gakuin University

Abstract: Employing the price-quality competition model in a horizontally differentiated products market, we analyze how a demand spillover effect associated with upgrading the quality level of a product affects the strategic relationship between firms and the property of a subgame perfect Nash equilibrium. In particular, we show that the strategic relationship depends on the degree of a demand spillover effect. Then, we consider the cases of second-best policy and cooperative quality choice. Furthermore, we illustrate that there exists a natural Stackelberg equilibrium under asymmetric demand spillover effects that is Pareto superior to other equilibria. Finally, we examine an optimal policy with international R&D rivalry.

Keywords: demand spillover effect; quality choice; product differentiation; Bertrand duopoly; a natural Stackelberg equilibrium; cooperative investment; optimal investment policy (search for similar items in EconPapers)
JEL-codes: L12 L13 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2012-06, Revised 2012-06
New Economics Papers: this item is included in nep-bec, nep-com and nep-ind
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:kgu:wpaper:89

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