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The market for melons: Cournot competition with unobservable qualities

Cédric Argenton

No 617, SSE/EFI Working Paper Series in Economics and Finance from Stockholm School of Economics

Abstract: Two firms produce different qualities at possibly different, constant marginal costs. They compete in quantities on a market where buyers only observe the average quality supplied. The model is a generalization of the standard Cournot duopoly, which corresponds to the special case where the two qualities are equal. When the quality differential is large, the firms' output levels are not always strategic substitutes. There can be no, or up to three pure-strategy equilibria. Yet, as long as the cost differential is not extreme, there always exists a stable duopolistic equilibrium. In that sense, strategic quantity-setting helps prevent market unraveling.

Keywords: Cournot competition; quality; duopoly; asymmetric information; Nash equilibrium (search for similar items in EconPapers)
JEL-codes: D43 D82 L13 L15 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2005-12-30, Revised 2006-05-08
New Economics Papers: this item is included in nep-com, nep-ind and nep-mic
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