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Vertical Product Differentiation When Quality is Scarce: The Case of n > 2 Firms

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  • Mark R. Frascatore

Abstract

This paper describes a model of vertical product differentiation in which more than two firms compete in quality and price. Quality is of fixed supply, so firms participate in an auction to attain it. Firms then simultaneously choose prices. The paper determines equilibrium bids in the quality auction and the Bertrand equilibrium prices. In equilibrium one firm attains all the units of quality, but pays a price such that it, like the minimum‐quality firms, earns zero profits. Aggregate welfare is computed, and is shown to decrease as competition increases.

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  • Mark R. Frascatore, 1999. "Vertical Product Differentiation When Quality is Scarce: The Case of n > 2 Firms," Australian Economic Papers, Wiley Blackwell, vol. 38(2), pages 120-130, June.
    • Handle: RePEc:bla:ausecp:v:38:y:1999:i:2:p:120-130
    DOI: 10.1111/1467-8454.00046
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    Cited by:

    1. Balan, David J. & Deltas, George, 2013. "Better product at same cost, lower sales and lower welfare," International Journal of Industrial Organization, Elsevier, vol. 31(4), pages 322-330.
    2. Mario Pezzino, 2010. "Minimum Quality Standards with More Than Two Firms Under Cournot Competition," The IUP Journal of Managerial Economics, IUP Publications, vol. 0(3), pages 26-45, August.

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