Quality Choice, Fixed Costs and Equilibrium in Models of Vertical Differentiation

DSE Working Paper No. 437

23 Pages Posted: 10 Jul 2009

See all articles by Matteo Alvisi

Matteo Alvisi

University of Bologna - Department of Economics

Date Written: April 1, 2000

Abstract

I provide a full characterization of the quality choice in duopolies with vertical differentiation, without assuming ex-ante if the market is fully covered or not. This will allow to show that covered or uncovered market configurations are endogenous outcomes of firms’ strategic interaction. To this purpose, I assume that firms are characterized by quadratic fixed costs of quality improvements and check whether pure-strategy subgame perfect equilibria with a corner solution always exist. Finally, my results are compared to the quality choice that maximizes the total surplus of the economy. I show that the welfare-maximizing choice of qualities does not have to be found in the same market configuration of the corresponding market equilibrium.

Keywords: quality, oligopoly, vertical differentiation, market configuration, subgame perfect equilibrium, welfare analysis.

JEL Classification: L12, L15, L82, L86

Suggested Citation

Alvisi, Matteo, Quality Choice, Fixed Costs and Equilibrium in Models of Vertical Differentiation (April 1, 2000). DSE Working Paper No. 437, Available at SSRN: https://ssrn.com/abstract=1416583 or http://dx.doi.org/10.2139/ssrn.1416583

Matteo Alvisi (Contact Author)

University of Bologna - Department of Economics ( email )

Strada Maggiore 45
Bologna, BO 40126
Italy
+39 051 2092646 (Phone)
+39 051 2092664 (Fax)

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