Endogenous Quality Differentiation in Congested Markets

David Reitman

Journal of Industrial Economics, 1991, vol. 39, issue 6, 621-47

Abstract: Firms selling a product with congestion externalities to a heterogeneous population of customers have an incentive to offer differentiated levels of quality. In a price competitive market, differentiation arises endogenously through the prices chosen by firms. In equilibrium, firms offer a range of prices, which induce an efficiency improving range of quality levels and allow customers to self-select their preferred price-quality combinations. Additional results suggest that, with many firms in the market, the choice of prices dominates the choice of service capacities in determining congestion levels. Copyright 1991 by Blackwell Publishing Ltd.

Date: 1991
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