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On the Regulation of A Vertically Differentiated Market Through Taxation/Subsidization of Product Quality

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  • L. Lambertini
  • M. Mosca

Abstract

The aim of this paper is to investigate a vertically differentiated market served either by a multiproduct monopolist or by duopolists, in which a public authority aiming at increasing the welfare level can choose among two instruments, namely, quality taxation/subsidization, and minimum quality standard. In the monopoly case they are equivalent as to the social welfare level, in that both allow the regulator to achieve the second best level of social welfare he would attain if he were to set qualities under the monopoly pricing rule, while they are not equivalent in terms of the distribution of surplus. In the duopoly regime, we show that there exists a taxation/subsidization scheme inducing firms to produce the socially optimal qualities.

Suggested Citation

  • L. Lambertini & M. Mosca, 1996. "On the Regulation of A Vertically Differentiated Market Through Taxation/Subsidization of Product Quality," Working Papers 247, Dipartimento Scienze Economiche, Universita' di Bologna.
    • Handle: RePEc:bol:bodewp:247
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    References listed on IDEAS

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    1. David Besanko & Shabtai Donnenfeld & Lawrence J. White, 1987. "Monopoly and Quality Distortion: Effects and Remedies," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(4), pages 743-767.
    2. Giulio Ecchia & Luca Lambertini, 1997. "Minimum Quality Standards and Collusion," Journal of Industrial Economics, Wiley Blackwell, vol. 45(1), pages 101-113, March.
    3. Robert B. Ekelund, 1970. "Price Discrimination and Product Differentiation in Economic Theory: An Early Analysis," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(2), pages 268-278.
    4. Baumol, William J & Bradford, David F, 1970. "Optimal Departures from Marginal Cost Pricing," American Economic Review, American Economic Association, vol. 60(3), pages 265-283, June.
    5. repec:bla:jindec:v:45:y:1997:i:1:p:101-13 is not listed on IDEAS
    6. Cremer, Helmuth & Thisse, Jacques-Francois, 1991. "Location Models of Horizontal Differentiation: A Special Case of Vertical Differentiation Models," Journal of Industrial Economics, Wiley Blackwell, vol. 39(4), pages 383-390, June.
    7. Besanko, David & Donnenfeld, Shabtai & White, Lawrence J, 1988. "The Multiproduct Firm, Quality Choice, and Regulation," Journal of Industrial Economics, Wiley Blackwell, vol. 36(4), pages 411-429, June.
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