Minimum Quality Standards and Non-Compliance
33 Pages Posted: 13 Jan 2015 Last revised: 7 Sep 2015
Date Written: September 2015
Abstract
This paper studies the effect of non-compliance with a minimum quality standard on prices, quality, and welfare in a vertical differentiation model. Non-compliance with a minimum quality standard by a low-quality firm reduces quality levels of both firms and shifts demand from the low-quality to the high-quality firm. Under non-compliance, an increase in the standard increases the quality of both products and shifts demand from the high-quality product to the low-quality product. Stricter government enforcement decreases the quality level of the low-quality firm and shifts demand from the low-quality firm to the high-quality firm. Non-compliance of the low-quality firm increases profits for both firms, reduces consumer surplus, and increases or decreases welfare depending on the market size, the detection probability, surveillance cost, and the minimum quality level.
Keywords: minimum quality standard, non-compliance, enforcement
JEL Classification: K42, L13, L50
Suggested Citation: Suggested Citation