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Quality Diversity and Prices in Markets for Experience Goods

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  • Gerhard O. Orosel
  • Klaus G. Zauner

Abstract

We analyze vertical product differentiation in a model where a good’s quality is unobservable to customers before purchase, a continuum of quality levels is technologically feasible, and minimum quality is supplied by a competitive fringe of firms. After purchase the true quality of the good is revealed. To provide firms with incentives to actually deliver promised quality, prices must exceed unit variable costs. We show that for a large class of customer preferences there is “quality polarization,” that is, only minimum and maximum feasible quality are available in the market. For the case without quality polarization we derive sufficient conditions for the incentive constraints to completely determine equilibrium prices, regardless of demand, for all intermediate quality levels.

Suggested Citation

  • Gerhard O. Orosel & Klaus G. Zauner, 2011. "Quality Diversity and Prices in Markets for Experience Goods," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(3), pages 709-738, September.
    • Handle: RePEc:bla:jemstr:v:20:y:2011:i:3:p:709-738
    DOI: 10.1111/j.1530-9134.2011.00308.x
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    Cited by:

    1. Han, Bing & Chouinard, Hayley H., 2014. "Product quality, advertising intensity and market size," Economics Letters, Elsevier, vol. 124(2), pages 215-218.
    2. Yong-Cong YANG & Pu-Yan NIE, 2016. "Asymmetric competition in food industry with product substitutability," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 62(7), pages 324-333.
    3. Moser, Christine & Hoffmann, Vivian & Ordonez, Romina, 2014. "Firm heterogeneity in food safety provision: evidence from aflatoxin tests in Kenya," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 170588, Agricultural and Applied Economics Association.
    4. Zan Zhang & Guofang Nan & Minqiang Li & Yong Tan, 2022. "Competitive Entry of Information Goods Under Quality Uncertainty," Management Science, INFORMS, vol. 68(4), pages 2869-2888, April.
    5. Moser, Christine & Hoffmann, Vivian, 2015. "Firm heterogeneity in food safety provision: Evidence from aflatoxin tests in Kenya:," IFPRI discussion papers 1416, International Food Policy Research Institute (IFPRI).
    6. Volodymyr Bilotkach, 2014. "Price Floors And Quality Choice," Bulletin of Economic Research, Wiley Blackwell, vol. 66(3), pages 231-245, July.

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