Strategic Quality Decisions under Heterogeneous Resource Endowments

Byong‐Duk Rhee and Seth Norton

Journal of Economics & Management Strategy, 2001, vol. 10, issue 2, 235-264

Abstract: The literature on product competition advocates a differentiation strategy assuming firm homogeneity in resources. However, firm heterogeneity in resource endowments has long been recognized in economics. Merging these two perspectives, we show that the increase in consumer preference for quality leads to firms' aggressive price competition instead of quality differentiation. As consumers look for higher quality, the cost advantage arising from superior resources increases and makes head‐to‐head competition more profitable than accommodating a less efficient rival. When consumers are highly concerned about quality, even a small resource difference leads a more efficient firm to initiate cutthroat price competition for market dominance.

Date: 2001
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