A New Model of Quality

Kala Krishna () and Tor Winston

No 6580, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a new model of quality to capture the idea that even if a customer chooses to purchase a product, it may fail to deliver.' In this event, the customer may wish to choose some other product. We model this as a two stage game where firms first choose quality and then price. We find that in equilibrium, the high quality firm (the one with a higher probability of being able to deliver') will always make higher profits than the low quality one even if costs of quality are sharply increasing. Our work thus provides a reason for high quality niches to be inherently more profitable. The implications for welfare and equilibrium under free entry are also studied.

JEL-codes: D4 D6 (search for similar items in EconPapers)
Date: 1998-05
Note: ITI
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published as Krishna, Kala and Tor Winston. "If At First You Don't Succeed...: Profits, Prices, And Market Structure In A Model Of Quality With Unknowable Consumer Heterogeneity," International Economic Review, 2003, v44(2,May), 573-597.

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