Strategic Quality Choice with Minimum Quality Standards
Stefan Lutz (),
Thomas Lyon () and
John Maxwell ()
No 1793, CEPR Discussion Papers from C.E.P.R. Discussion Papers
In many markets governments set minimum quality standards while some sellers choose to compete on the basis of quality by exceeding them. Such ‘high-quality’ strategies often win public acclaim, especially when ‘environmental friendliness’ is the dimension along which firms are differentiated. We analyse this phenomenon using a duopoly model of vertical product differentiation. A minimum quality standard leads both the high-quality and the low-quality firm to increase product qualities, lower prices, and increase quantities sold. As a result, total welfare increases. Industry profits fall, however, because reduced quality differentiation intensifies price competition. If the high-quality firm can commit to a quality level before regulations are promulgated, it induces the regulator to weaken its standards, and welfare falls.
Keywords: Environment; Product Differentiation; Quality; Regulation (search for similar items in EconPapers)
JEL-codes: L13 L15 L51 Q28 (search for similar items in EconPapers)
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