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Bidirectional Distortion in Self-Selection Problems

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  • Srinagesh, Padmanabhan
  • Bradburd, Ralph
  • Koo, Hui-Wen

Abstract

This paper considers assumptions on consumer heterogeneity that can generate bidirectional distortion in a model of quality discrimination. It is shown that the profit-maximizing strategy can involve the simultaneous degradation of quality at the low end of the spectrum, while quality enhancement occurs at the high end. The implications of this result for optimal income taxes and incentive regulation are drawn out. It is argued that the welfare losses of quality distortion are likely to be lower under bidirectional distortion than under the unidirectional distortion derived in the literature. Copyright 1992 by Blackwell Publishing Ltd.

Suggested Citation

  • Srinagesh, Padmanabhan & Bradburd, Ralph & Koo, Hui-Wen, 1992. "Bidirectional Distortion in Self-Selection Problems," Journal of Industrial Economics, Wiley Blackwell, vol. 40(2), pages 223-228, June.
    • Handle: RePEc:bla:jindec:v:40:y:1992:i:2:p:223-28
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    Cited by:

    1. Sibly, Hugh, 2008. "Vertical Product Differentiation with Linear Pricing," Working Papers 7335, University of Tasmania, Tasmanian School of Business and Economics, revised 01 Jul 2008.
    2. Mookherjee, Dilip & Png, I P L, 1994. "Marginal Deterrence in Enforcement of Law," Journal of Political Economy, University of Chicago Press, vol. 102(5), pages 1039-1066, October.
    3. Sibly, Hugh, 2008. "Quality Versus Quantity in Vertically Differentiated Products Under Non-Linear Pricing," Working Papers 7335, University of Tasmania, Tasmanian School of Business and Economics, revised 01 Jun 2008.

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