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PRICE FLOORS AND QUALITY CHOICE
Author(s) -
Bilotkach Volodymyr
Publication year - 2014
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/j.1467-8586.2011.00422.x
Subject(s) - economics , quality (philosophy) , microeconomics , limit price , mid price , product (mathematics) , nash equilibrium , investment (military) , price level , econometrics , monetary economics , mathematics , philosophy , geometry , epistemology , politics , political science , law
This paper studies effects of price floors in a simple model of vertical product differentiation. We find that even non‐binding price floor (i.e., minimum price set below the lowest Nash equilibrium price in the baseline model) can increase quality on the market, if the cost of quality is sufficiently low. Where a binding price floor does not increase the equilibrium quality, it makes consumers worse off. There is also a possibility of over‐investment into quality as a result of the binding minimum price.