Bidimensional Vertical Differentiation

27 Pages Posted: 24 Mar 2012  

Paolo G. Garella

University of Milan - Dipartimento di Scienze Economiche, Aziendali e Statistiche

Luca Lambertini

University of Bologna - Department of Economics

Date Written: January 13, 2012

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.

Keywords: Oligopoly equilibrium, vertical differentiation, quality, MQS

JEL Classification: L10, L13, L15

Suggested Citation

Garella, Paolo G. and Lambertini, Luca, Bidimensional Vertical Differentiation (January 13, 2012). Available at SSRN: https://ssrn.com/abstract=2027430 or http://dx.doi.org/10.2139/ssrn.2027430

Paolo G. Garella (Contact Author)

University of Milan - Dipartimento di Scienze Economiche, Aziendali e Statistiche ( email )

via Conservatorio 7
Milano, 20122
Italy

Luca Lambertini

University of Bologna - Department of Economics ( email )

Strada Maggiore 45
Bologna, 40125
Italy
+39 051 2092600 (Phone)
+39 051 2092664 (Fax)

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