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Product Varieties in a Quality-Differentiated Goods Monopoly

Changying Li () and Jianhu Zhang

Journal of Institutional and Theoretical Economics (JITE), 2019, vol. 175, issue 3, 524-536

Abstract: This paper analyzes market versus optimal product varieties in a vertically differentiated goods monopoly. Four results are obtained. First, compared to the first- or second-best optimum, product varieties are always undersupplied by a monopolist. Second, the quality range under a monopoly is smaller than that under the first- or second-best optimum. Third, the monopolist distorts the lowest quality upward while distorting the highest quality downward. Finally, a fixed-cost subsidy can lead to a second-best outcome where a social planner determines the number of product varieties and the corresponding qualities, and the monopolist decides the prices.

Keywords: monopoly; product varieties; quality distortion; variable-cost (fixed-cost) subsidy; first-best (second-best) optimum (search for similar items in EconPapers)
JEL-codes: L12 D42 L52 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1628/jite-2018-0014

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