Better Product at Same Cost: Leader Innovation vs. Generic Product Improvement

David J. Balan and George Deltas ()

Chapter 4 in The Analysis of Competition Policy and Sectoral Regulation, 2014, pp 93-113 from World Scientific Publishing Co. Pte. Ltd.

Abstract: We develop a parametric model in which a high-quality dominant firm faces a low-quality competitive fringe. We show that in this model, an increase in the dominant firm's product quality increases total welfare and consumer surplus. An increase in fringe firm quality has an ambiguous effect on total welfare, but always increases consumer surplus. Moreover, an increase in fringe quality always leads to a bigger increase in consumer surplus than does an increase in dominant firm quality, but the analogous comparison for total welfare is ambiguous. Finally, we show that an increase in dominant firm quality always increases total welfare by more than it increases consumer surplus, whereas for an increase in fringe firm quality, the opposite is true. The first of these findings relies on our parametric assumptions, but the others appear not to. We discuss the relevance of these results to public policy.

Keywords: Competition Policy; Sectoral Regulation; Pattern Asymmetry; Market Consolidation; Grocery Retailing; Pricing Developments; Industry Structure; Price Effects of Mergers; Input Price Shocks; Quantity Discounts (search for similar items in EconPapers)
Date: 2014
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