Bidimensional Vertical Differentiation

Abstract:     
In markets where product quality is important, more than one characteristic is usually necessary to de…fine product quality. Standard models maintain that: (i) in a duopoly there will be a quality leader no matter whether the product can incorporate one or two vertical attributes; (ii) differentiation pertains only to one attribute. By contrast, in our set-up there are also equilibria where the quality leader is better in two attributes, and others where there is cross leadership, namely a situation where each …firm designs a product to dominate the other in one characteristic. The role of cost complementarities is also examined. Applications to Minimum Quality Standards, tax (subsidy) on quality products, and home bias effects are sketched, showing that welfare assessments and the related policy implications based on standard models may be incomplete.

Number of Pages in PDF File: 27

Keywords: Oligopoly equilibrium, vertical differentiation, quality, MQS

JEL Classification: L10, L13, L15

working papers series