Does a Minimum Quality Standard Always Reduce the Price of High Quality Products?

Panzar John C () and Savage Ian ()
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Panzar John C: University of Auckland
Savage Ian: Northwestern University

The B.E. Journal of Economic Analysis & Policy, 2011, vol. 11, issue 1, 32

Abstract: This paper investigates the standard finding that instituting a minimum quality standard within a vertically differentiated market unambiguously benefits consumers of high quality products. A competitive model is specified in which random cost shocks lead some firms to cheat in equilibrium on their reputation for high quality. When cheating occurs, instituting or raising the level of a minimum standard can lead to the price of high quality products either increasing or decreasing. The effect of a minimum quality standard on the price of high quality products becomes an empirical rather than a theoretical issue.

Keywords: reputation; cheating; product quality; minimum quality standard (search for similar items in EconPapers)
Date: 2011
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DOI: 10.2202/1935-1682.2333

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