Low Quality Leadership in Vertically Differentiated Duopoly

Michael Kuhn

Discussion Papers from Department of Economics, University of York

Abstract: According to the business literature a firm's competitive position is determined by the nature of the market. In a 'premium' market, profit leadership falls to firms of- fering high quality, whereas in a 'value' market, it falls to low quality providers, which on grounds of a cost advantage capture a major market share. We incorporate this idea into a model of a vertically differentiated duopoly. In contrast to more conventional models, we assume that gross surplus from unit consumption consists of a benefit from quality and a baseline benefit. Consumers are heterogeneous (homoge-neous) with regard to the former (latter). Marginal cost increases in quality. We derive the quality-then-price equilibrium in a non-covered market and show that a re-duction in (maximum) willingness to pay relative to baseline benefit induces low quality leadership first in market share and subsequently in profit. Under low quality profit leadership, a minimum quality standard reduces consumer surplus if con-sumer's willingness to pay is sufficiently low and always reduces profits and welfare.

Keywords: Low quality leadership; vertical product differentiation; minimum quality standard. (search for similar items in EconPapers)
JEL-codes: L13 L15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ind
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://www.york.ac.uk/media/economics/documents/discussionpapers/2000/0038.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:yor:yorken:00/38

Access Statistics for this paper

More papers in Discussion Papers from Department of Economics, University of York Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom. Contact information at EDIRC.
Bibliographic data for series maintained by Paul Hodgson ().