Strategic Quality Choice with Minimum Quality Standards

Stefan Lutz, Thomas Peyton Lyon () and John W. Maxwell ()

No 1793, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In many markets governments set minimum quality standards while some sellers choose to compete on the basis of quality by exceeding them. Such ‘high-quality’ strategies often win public acclaim, especially when ‘environmental friendliness’ is the dimension along which firms are differentiated. We analyse this phenomenon using a duopoly model of vertical product differentiation. A minimum quality standard leads both the high-quality and the low-quality firm to increase product qualities, lower prices, and increase quantities sold. As a result, total welfare increases. Industry profits fall, however, because reduced quality differentiation intensifies price competition. If the high-quality firm can commit to a quality level before regulations are promulgated, it induces the regulator to weaken its standards, and welfare falls.

Keywords: Environment; Product Differentiation; Quality; Regulation (search for similar items in EconPapers)
JEL-codes: L13 L15 L51 Q28 (search for similar items in EconPapers)
Date: 1998-01
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