Endogenous Quality Choice: Price and Quantity Competition

Tarek Selim ()

MPRA Paper from University Library of Munich, Germany

Abstract: The present paper is concerned with providing a core model to address the issue of firms simultaneously competing in both prices and quantities (capacity levels) within a simple duopoly market setting where products are asymmetrically differentiated by endogenous quality location. A three-stage competitive framework is introduced such that non-collusive firms compete in quality location, followed by choice of fixed capacity, and finally, they compete in prices. There is a continuum of consumers uniformly distributed along a vertical quality street of product locations. In general, a Bertrand-Nash equilibrium with fixed Cournot quantities (fixed capacity) is achieved. Firms tend to move away from minimum differentiation as quality cross-effects in fixed cost investments become less severe, but not necessarily choosing quality locations which would lead towards an outcome of maximum differentiation. An output asymmetry always exists at equilibrium such that the high quality firm always carries excess production capacity relative to the low quality firm. Total production capacity, however, may not fully cover market demand for an incumbent duopoly.

Keywords: Product differentiation; Duopoly; Bertrand prices; Nash equilibrium; Cournot capacity; Market Entry; Uncovered market; endogenous choice; vertical location; Quality signals; Competition games; Multi-stage model (search for similar items in EconPapers)
JEL-codes: C72 D21 D43 L15 L23 (search for similar items in EconPapers)
Date: 2004-05
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Journal Article: Endogenous quality choice: price and quantity competition (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:119496

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