Quality Choice, Fixed Costs and Equilibrium in Models of Vertical Differentiation

M. Alvisi

Working Papers from Dipartimento Scienze Economiche, Universita' di Bologna

Abstract: I provide a full characterization of the quality choice in duopolies with vertical differentiation, without assuming ex-ante if the market is fully covered or not. This will allow to show that covered or uncovered market configurations are endogenous outcomes of firms strategic interaction. To this purpose, I assume that firms are characterized by quadratic fixed costs of quality improvements and check whether pure-strategy subgame perfect equilibria with a corner solution always exist. Finally, my results are compared to the quality choice that maximizes the total surplus of the economy. I show that the welfaremaximizing choice of qualities does not have to be found in the same market configuration of the corresponding market equilibrium.

Date: 2000
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Persistent link: https://EconPapers.repec.org/RePEc:bol:bodewp:437

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