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Product Bans May Benefit Consumers: Implications from a New Model Of Vertical Product Differentiation

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  • Toker Doganoglu
  • Firat Inceoglu

Abstract

We formulate a model of vertical differentiation to evaluate the welfare effects of removing a low quality product from the market. The mechanism through which a welfare improvement might arise is simple: Once the low quality low cost alternative is banned, entry into the high quality segment becomes more likely. This in turn may lead to a significant reduction in the price of the high quality product. We find that such a ban might improve consumer as well as aggregate welfare when consumers value the higher quality more, the marginal cost of producing high quality is lower, the price of low quality is higher, and the price sensitivity for high quality is not too high. The key feature of our model is that it allows elastic demands by individual consumers. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Toker Doganoglu & Firat Inceoglu, 2015. "Product Bans May Benefit Consumers: Implications from a New Model Of Vertical Product Differentiation," Journal of Industry, Competition and Trade, Springer, vol. 15(2), pages 155-180, June.
    • Handle: RePEc:kap:jincot:v:15:y:2015:i:2:p:155-180
    DOI: 10.1007/s10842-014-0179-z
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    References listed on IDEAS

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    3. Leland, Hayne E, 1979. "Quacks, Lemons, and Licensing: A Theory of Minimum Quality Standards," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1328-1346, December.
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    5. Valletti, Tommaso M, 2000. "Minimum Quality Standards under Cournot Competition," Journal of Regulatory Economics, Springer, vol. 18(3), pages 235-245, November.
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    More about this item

    Keywords

    Vertical product differentiation; Product ban; Standards; Quality; L1; L11; L50; D43;
    All these keywords.

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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