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Producers bargaining over a quality standard

Cédric Argenton

No 618, SSE/EFI Working Paper Series in Economics and Finance from Stockholm School of Economics

Abstract: We study an asymmetric information model in which two firms are active on a market where buyers only observe the average quality supplied. Quantities and cost structures are exogenously given and firms compete in quality. Before choosing their qualities, they bargain over a perfectly enforcable minimum quality standard. The bargaining outcome is given by the Kalai-Smorodinsky (KS) solution. Agreement on a binding standard is possible only if the firms are sufficiently similar with respect to their production costs. The agreed-upon standard always falls short of the joint-profit-maximizing (or, for that matter, the efficient) level. It is decreasing in the high-cost producer's cost of production. Yet, it first increases then decreases with the low-cost producer's cost of production, showing that the latter's bargaining position can be enhanced by seemingly adverse cost changes.

Keywords: asymmetric information; minimum quality standard; duopoly; bargaining; free riding. (search for similar items in EconPapers)
JEL-codes: D43 D82 L13 L15 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2005-12-30, Revised 2006-05-08
New Economics Papers: this item is included in nep-mic
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