Price versus Quantity: Market-Clearing Mechanisms When Consumers Are Uncertain about Quality

Andrew Metrick and Richard Zeckhauser

Journal of Risk and Uncertainty, 1998, vol. 17, issue 3, 215-42

Abstract: High-quality producers in a market where quality varies can reap superior profits by charging higher prices, selling greater quantities, or both. Empirical analyses of the mutual fund and automobile industries show that high-quality producers sell more units than their low-quality competitors, but at no higher price (or retail markup) per unit. Our theoretical models find that if qualities are known by consumers and production costs are constant, then having a higher quality secures the producer both higher price and higher quantity. The market may clear in a different fashion if there is "quality uncertainty"; that is, if some consumers can discern quality but others cannot. Then, high- and low-quality producers may end up setting a common price, which allows the high-quality producer to sell substantially more. In this context, quality begets quantity. Copyright 1998 by Kluwer Academic Publishers

Date: 1998
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