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Quality Leadership when Regulatory Standards are Forthcoming
Author(s) -
Lutz Stefan,
Lyon Thomas P.,
Maxwell John W.
Publication year - 2000
Publication title -
the journal of industrial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.93
H-Index - 77
eISSN - 1467-6451
pISSN - 0022-1821
DOI - 10.1111/1467-6451.00126
Subject(s) - commit , legislature , quality (philosophy) , duopoly , business , product (mathematics) , industrial organization , product differentiation , public economics , welfare , economics , market economy , political science , computer science , law , philosophy , geometry , mathematics , epistemology , database
In many markets, governments set minimum quality standards while some sellers compete on the basis of quality by exceeding them. Such quality leadership strategies often win public acclaim, especially when they involve environmental attributes. Using a duopoly model of vertical product differentiation, we show that if the high‐quality firm can commit to a quality level before regulations are promulgated, it induces the regulator to weaken standards, and welfare falls. Our results raise doubts about the social benefits of corporate self‐regulation, and highlight the dangers of lengthy delays between legislative mandates for new regulations and their implementation.