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A Note on the High–quality Advantage in Vertical Differentiation Models
Author(s) -
Wang X. Henry
Publication year - 2003
Publication title -
bulletin of economic research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.227
H-Index - 29
eISSN - 1467-8586
pISSN - 0307-3378
DOI - 10.1111/1467-8586.00163
Subject(s) - product differentiation , quality (philosophy) , profit (economics) , economics , microeconomics , fixed cost , variable cost , quality costs , industrial organization , operations management , cost control , philosophy , epistemology , cournot competition
It is well established in vertical product differentiation models that the high–quality firm reaps a larger profit in a two–stage quality–price game as long as the cost of quality improvement is zero or is borne as fixed cost in the first stage quality choice. This note shows that the high–quality advantage may fail to hold if there is variable cost of production that is dependent on quality.