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Price Versus Quantity: Market Clearing Mechanisms When Sellers Differ in Quality


Richard J. Zeckhauser


Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Andrew Metrick


Yale School of Management; National Bureau of Economic Research (NBER)

August 1996

NBER Working Paper No. w5728

Abstract:     
High-quality producers in a vertically differentiated market can reap superior profits by charging higher prices, selling greater quantities, or both. If qualities are known by consumers and production costs are constant, then having a higher quality secures the producer both higher price and higher quantity; if marginal costs are rising, having a higher quality assures only higher price. If only some consumers can discern quality but others cannot, then high- and low-quality producers may set a common price, but the high-quality producer will sell more. In this context, quality begets quantity. Empirical analyses suggest that in both the mutual fund and automobile industries, high-quality producers sell more units than their low-quality competitors, but at no higher price (or markup) per unit.

Number of Pages in PDF File: 41

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Date posted: November 6, 1996  

Suggested Citation

Zeckhauser, Richard J. and Metrick, Andrew, Price Versus Quantity: Market Clearing Mechanisms When Sellers Differ in Quality (August 1996). NBER Working Paper No. w5728. Available at SSRN: http://ssrn.com/abstract=4399

Contact Information

Richard J. Zeckhauser (Contact Author)
Harvard University - Harvard Kennedy School (HKS) ( email )
79 John F. Kennedy Street
Cambridge, MA 02138
United States
617-495-1174 (Phone)
617-384-9340 (Fax)
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
617-495-1174 (Phone)
617-496-3783 (Fax)
Andrew Metrick
Yale School of Management ( email )
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
(203)-432-3069 (Phone)
HOME PAGE: http://mba.yale.edu/faculty/profiles/metrick.shtml

National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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