IDEAS home Printed from https://ideas.repec.org/p/tas/wpaper/7335.html
   My bibliography  Save this paper

Quality Versus Quantity in Vertically Differentiated Products Under Non-Linear Pricing

Author

Abstract

Quality is defined as being skewed when the marginal rate of substitution (MRS) between quantity and quality differs from the marginal rate of transformation (MRT). This definition is used to assess the balance of quality and quantity in each variety of good produced by a monopolist using non-linear pricing, where each variety can be differentiated using both quantity and quality. A variety’s decisive customers face a binding self-selection or participation constraint. Skewing of a variety’s quality occurs when there is a difference between its decisive customer(s) MRS and that of (i) its non-decisive customers (ii) the decisive customers of ‘adjacent varieties’. Some important special cases are identified and analysed.

Suggested Citation

  • 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.
    • Handle: RePEc:tas:wpaper:7335
    as

    Download full text from publisher

    File URL: http://eprints.utas.edu.au/7335/1/DP2008_No_03_Sibly.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Matthews, Steven & Moore, John, 1987. "Monopoly Provision of Quality and Warranties: An Exploration in the Theory of Multidimensional Screening," Econometrica, Econometric Society, vol. 55(2), pages 441-467, March.
    2. 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.
    3. Swan, Peter L, 1970. "Durability of Consumption Goods," American Economic Review, American Economic Association, vol. 60(5), pages 884-894, December.
    4. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
    5. 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.
    6. Michael Waldman, 2003. "Durable Goods Theory for Real World Markets," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 131-154, Winter.
    7. David Levhari & Yoram Peles, 1973. "Market Structure, Quality and Durability," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 235-248, Spring.
    8. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, April.
    9. Srinagesh, Padmanabhan & Bradburd, Ralph M, 1989. "Quality Distortion by a Discriminating Monopolist," American Economic Review, American Economic Association, vol. 79(1), pages 96-105, March.
    10. Kim, Joo-Han & Kim, Jae-Cheol, 1996. "Quality choice of multiproduct monopolist and spill-over effect," Economics Letters, Elsevier, vol. 52(3), pages 345-352, September.
    11. Schmalensee, Richard, 1979. "Market Structure, Durability, and Quality: A Selective Survey," Economic Inquiry, Western Economic Association International, vol. 17(2), pages 177-196, April.
    12. McAfee, R. Preston & McMillan, John, 1988. "Multidimensional incentive compatibility and mechanism design," Journal of Economic Theory, Elsevier, vol. 46(2), pages 335-354, December.
    13. Donnenfeld, Shabtai & White, Lawrence J, 1990. "Quality Distortion by a Discriminating Monopolist: Comment," American Economic Review, American Economic Association, vol. 80(4), pages 941-945, September.
    14. Armstrong, Mark, 1996. "Multiproduct Nonlinear Pricing," Econometrica, Econometric Society, vol. 64(1), pages 51-75, January.
    15. repec:bla:econom:v:55:y:1988:i:219:p:393-401 is not listed on IDEAS
    16. Eric Maskin & John Riley, 1984. "Monopoly with Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 171-196, Summer.
    17. A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 417-429, Autumn.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    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. Gerstle, Ari D. & Waldman, Michael, 2016. "Mergers in durable-goods industries: A re-examination of market power and welfare effects," Research in Economics, Elsevier, vol. 70(4), pages 677-692.
    3. Hugh Sibly, 2017. "Product Quality With Heterogeneous Consumers and Linear Pricing," Australian Economic Papers, Wiley Blackwell, vol. 56(4), pages 328-351, December.
    4. Sibly, Hugh, 2007. "Loss aversion, price and quality," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 36(5), pages 771-788, October.
    5. Pascal Courty & Li Hao, 2000. "Sequential Screening," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 67(4), pages 697-717.
    6. Bing Jing & Roy Radner, 2004. "Nonconvex Production Technology and Price Discrimination," Working Papers 04-04, New York University, Leonard N. Stern School of Business, Department of Economics.
    7. Hugh Sibly, 2009. "The Determinants Of The Quantity‐Quality Balance In Monopoly," Australian Economic Papers, Wiley Blackwell, vol. 48(1), pages 65-79, March.
    8. X. Ruiz del Portal, 2012. "Conditions for incentive compatibility in models with multidimensional allocation functions and one-dimensional types," Review of Economic Design, Springer;Society for Economic Design, vol. 16(4), pages 311-321, December.
    9. Sibly, Hugh, 2012. "A decomposition of monopolistic quality distortion," Research in Economics, Elsevier, vol. 66(1), pages 97-105.
    10. Andersson, Tommy, 2004. "Essays on Nonlinear Pricing and Welfare," MPRA Paper 59446, University Library of Munich, Germany.
    11. Guy Ho Wang, 2000. "On The Dynamic Incentive of Price-Quality Differentiation By A Monopolist Firm," International Economic Journal, Taylor & Francis Journals, vol. 14(1), pages 33-45.
    12. Tian Xia & Richard Sexton, 2010. "Brand or Variety Choices and Periodic Sales as Substitute Instruments for Monopoly Price Discrimination," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 36(4), pages 333-349, June.
    13. Clerides, Sofronis & Hadjiyiannis, Costas, 2008. "Quality standards for used durables: An indirect subsidy?," Journal of International Economics, Elsevier, vol. 75(2), pages 268-282, July.
    14. Yao Luo & Isabelle Perrigne & Quang Vuong, 2018. "Structural Analysis of Nonlinear Pricing," Journal of Political Economy, University of Chicago Press, vol. 126(6), pages 2523-2568.
    15. Joaquín Coleff, 2020. "Can consumer complaints reduce product reliability? Should we worry?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 29(1), pages 74-96, January.
    16. Carlier, Guillaume & Dupuis, Xavier & Rochet, Jean-Charles & Thanassoulis, John, 2024. "A general solution to the quasi linear screening problem," Journal of Mathematical Economics, Elsevier, vol. 114(C).
    17. Brekke, Kurt R. & Siciliani, Luigi & Straume, Odd Rune, 2010. "Price and quality in spatial competition," Regional Science and Urban Economics, Elsevier, vol. 40(6), pages 471-480, November.
    18. Lambertini, Luca & Orsini, Raimondello & Palestini, Arsen, 2017. "On the instability of the R&D portfolio in a dynamic monopoly. Or, one cannot get two eggs in one basket," International Journal of Production Economics, Elsevier, vol. 193(C), pages 703-712.
    19. Nathan Berg & Jeong†Yoo Kim, 2018. "Price Discrimination in Public Healthcare," Australian Economic Papers, Wiley Blackwell, vol. 57(2), pages 181-192, June.
    20. Kimmo Berg, 2013. "Complexity of solution structures in nonlinear pricing," Annals of Operations Research, Springer, vol. 206(1), pages 23-37, July.

    More about this item

    Keywords

    vertical differentiation; quality; non-linear pricing;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tas:wpaper:7335. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oscar Pavlov (email available below). General contact details of provider: https://edirc.repec.org/data/dutasau.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.