A VERTICALLY DIFFERENTIATED DUOPOLY WITH MARGINAL COST DIFFERENTIALS

Pamela M. Schmitt ()
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Pamela M. Schmitt: Department of Economics, United States Naval Academy, 589 McNair Road 10-D, Annapolis, Maryland 21402, USA

International Game Theory Review (IGTR), 2003, vol. 05, issue 01, 73-81

Abstract: A vertically differentiated duopoly model analyzes the impact of marginal cost differentials on price and quality. Firms play a two-stage game, first simultaneously choosing quality and then simultaneously choosing price. When the firm producing the high quality good faces an increase in its marginal cost, both firms increase price and upgrade quality. When the firm producing the low quality good faces an increase in its marginal cost, both firms decrease price and downgrade quality. When a first firm enters the market, quality position decisions are examined under the assumption that both the firm-specific and the quality-specific marginal costs are higher when a firm produces a higher quality good. The results show that the first entrant produces the low quality good and earns higher profits.

Keywords: Vertical differentiation; firm strategy; product quality; JEL Classification L13; JEL Classification L11; JEL Classification L15 (search for similar items in EconPapers)
JEL-codes: B4 C0 C6 C7 D5 D7 M2 (search for similar items in EconPapers)
Date: 2003
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Citations: View citations in EconPapers (1)

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DOI: 10.1142/S0219198903000908

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