Minimum Quality Standards and Non-Compliance

33 Pages Posted: 13 Jan 2015 Last revised: 7 Sep 2015

See all articles by Laura Birg

Laura Birg

University of Goettingen (Göttingen)

Jan Voßwinkel

Nuertingen-Geislingen University

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

Birg, Laura and Voßwinkel, Jan, Minimum Quality Standards and Non-Compliance (September 2015). Available at SSRN: https://ssrn.com/abstract=2548467 or http://dx.doi.org/10.2139/ssrn.2548467

Laura Birg (Contact Author)

University of Goettingen (Göttingen) ( email )

Platz der Goettinger Sieben 3
Goettingen, D-37073
Germany
+49 551 39 19686 (Phone)

Jan Voßwinkel

Nuertingen-Geislingen University ( email )

Neckarsteige 6-10
Nuertingen, 72622
Germany

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