Qualitätsunsicherheit als Ursache von Marktversagen - Anpassungsmechanismen und Regulierungsbedarf

Quality Uncertainty as a Source of Market Failure: Adjustment Mechanisms and Regulatory Implications

Ingo Rapold

MPRA Paper from University Library of Munich, Germany

Abstract: This dissertation analyzes market failure under quality uncertainty and develops the goodwill approach as an alternative to signalling models in information economics. The study focuses on the existence of irreversible entry costs that arise endogenously from informational frictions rather than from explicit expenditures such as advertising or introductory pricing. The central idea is that new entrants in markets with incomplete consumer information cannot immediately sell their profit-maximizing output at the prevailing market price, because consumers initially lack sufficient trust in their product quality. As a result, newcomers must operate temporarily at higher average costs than established firms. Market entry therefore continues only as long as incumbent suppliers earn prices that at least compensate these initial cost disadvantages. In equilibrium, price premia for high-quality products persist even under free market entry. These equilibrium premia provide the incentive for established firms to maintain product quality: as long as the present value of future price premia exceeds the potential short-term gain from hidden quality deterioration, quality will be sustained. Non-cost-covering introductory prices or advertising expenses are not essential components of the goodwill model but represent optional instruments to reduce the irreversible costs of market entry. Beyond this theoretical contribution, the dissertation discusses the resulting implications for competition policy and regulation in markets characterized by persistent quality uncertainty.

Keywords: Quality uncertainty; Goodwill; Market failure; Information economics; Asymmetric information; Reputation; Entry costs; Regulatory policy (search for similar items in EconPapers)
JEL-codes: D82 L15 L51 (search for similar items in EconPapers)
Date: 1988-06
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