Better product at same cost, lower sales and lower welfare

David J. Balan, George Deltas

Research output: Contribution to journalArticle

Abstract

We consider a high-quality dominant firm facing a low-quality competitive fringe. We show that the dominant firm's quantity is (weakly) increasing in its quality if and only if its marginal cost (weakly) exceeds that of the fringe; otherwise it is strictly decreasing in quality. This result is driven by the fact that a quality increase causes the marginal revenue curve to rotate clockwise, rather than shift outwards, and at a height equal to the fringe firms' marginal cost. This fact, combined with the dominant firm's MR = MC condition, determines the result. For closely related reasons, the effect of a quality increase on consumer welfare also depends on the relationship between the costs. It is possible that all consumers are (weakly) better off, that some are better off and some worse off, or that all are (weakly) worse off. We also consider several extensions and variations of the model.

Original languageEnglish (US)
Pages (from-to)322-330
Number of pages9
JournalInternational Journal of Industrial Organization
Volume31
Issue number4
DOIs
StatePublished - Jun 17 2013

Keywords

  • Competitive fringe
  • Dominant firm
  • Product innovation
  • Vertical differentiation

ASJC Scopus subject areas

  • Industrial relations
  • Aerospace Engineering
  • Economics and Econometrics
  • Economics, Econometrics and Finance (miscellaneous)
  • Strategy and Management
  • Industrial and Manufacturing Engineering

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