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Price discrimination and quality improvement

Author

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  • Amy Jocelyn Glass

Abstract

This paper models quality improvements when multiple quality levels can sell, owing to differences in consumers' valuations of quality improvements. Firms can collude to price discriminate, so that consumers with high valuations pay a price premium, while others receive a quality level below the highest available. Imposing minimum quality standards or price ceilings can ensure that only the highest quality level of each product is sold. Such intervention reduces the quality‐adjusted price paid by consumers but also reduces the incentives for firms to innovate. When enough consumers have high valuations, such intervention must be welfare reducing, owing to reduced innovation. JEL Classification: O31, L16 Discrimination par les prix et amélioration de la qualité. Ce mémoire présente un modèle d'amélioration de la qualité quand on peut vendre des produits à divers niveaux de qualitéà cause des différences dans les évaluations d'amélioration de qualité par les consommateurs. Les entreprises peuvent entrer en collusion pour faire de la discrimination par les prix de manière à ce que les consommateurs qui apprécient davantage la qualité paient une prime pendant que les autres consommateurs reçoivent une qualité au‐dessous de ce qui est la meilleure qualité disponible. Si on impose des normes de qualité minimale ou des plafonds aux prix, on peut s'assurer que seuls les produits de la plus haute qualité seront vendus. De telles interventions réduisent le niveau de prix ajusté pour la qualité payé par les consommateurs, mais réduisent aussi les incitations des entreprises à innover. Quand un nombre suffisant de consommateurs apprécient beaucoup la qualité, de telles interventions peuvent réduire le niveau de bien‐être à cause des innovations moins importantes.

Suggested Citation

  • Amy Jocelyn Glass, 2001. "Price discrimination and quality improvement," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 34(2), pages 549-569, May.
  • Handle: RePEc:wly:canjec:v:34:y:2001:i:2:p:549-569
    DOI: 10.1111/0008-4085.00088
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    Citations

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    Cited by:

    1. Boccard Nicolas & Wauthy Xavier Y., 2010. "Ensuring Quality Provision through Capacity Regulation under Price Competition," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 10(1), pages 1-27, October.
    2. Eduardo Correia de Souza & Jorge Chami Batista, 2015. "Replacement cycles, income distribution and dynamic price discrimination," Applied Economics, Taylor & Francis Journals, vol. 47(31), pages 3292-3310, July.
    3. Jorge Chami Batista & Yan Liu, 2017. "Export Quality and the Dynamics of North–South Competition," The World Economy, Wiley Blackwell, vol. 40(1), pages 207-232, January.
    4. Karen Dury & Özlem Oomen, 2007. "The real exchange rate and quality improvements," Bank of England working papers 320, Bank of England.
    5. Reto Foellmi & Josef Zweimuller, 2006. "Income Distribution and Demand-Induced Innovations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 73(4), pages 941-960.
    6. Jorge Chami Batista & Yan Liu, 2016. "Export Quality And The Dynamics Of North-South Competition," Anais do XLII Encontro Nacional de Economia [Proceedings of the 42nd Brazilian Economics Meeting] 108, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    7. Achim I. Czerny & Anming Zhang, 2015. "Third‐degree price discrimination in the presence of congestion externality," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 48(4), pages 1430-1455, November.
    8. Corrado Benassi & Alessandra Chirco & Caterina Colombo, 2006. "Vertical Differentiation And The Distribution Of Income," Bulletin of Economic Research, Wiley Blackwell, vol. 58(4), pages 345-367, October.
    9. Besancenot, Damien & Vranceanu, Radu, 2004. "Quality and price dispersion in an equilibrium search model," Journal of Economics and Business, Elsevier, vol. 56(2), pages 99-116.

    More about this item

    JEL classification:

    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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