Quality Leadership When Regulatory Standards are Forthcoming

Posted: 28 Jun 2000

See all articles by Stefan Lutz

Stefan Lutz

Lutz-Econ; HMKW University

Thomas P. Lyon

University of Michigan, Stephen M. Ross School of Business

John W. Maxwell

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy; Indiana University, Department of Economics; Richard Ivey School of Business

Abstract

In many markets, governments set minimum quality standards while some sellers choose to compete on the basis of quality by exceeding them. We analyze this phenomenon using a model of vertical product differentiation, interpreting quality as an "environmental friendliness" characteristic fully internalized by the consumer. A standard raising minimum quality then reduces maximum pollution per unit of products sold in the market. In the duopoly case, this leads to increased product qualities, increased quantities sold of both products, and reduced total pollution. As a result, total welfare increases. However, industry profits fall due to increased competition caused by reduced quality differentiation. If the high-quality firm can commit to a specific quality level before regulations are promulgated, it can induce the regulator to weaken its standards, with the result that welfare is reduced.

JEL Classification: L13, L15, L51, Q28

Suggested Citation

Lutz, Stefan and Lyon, Thomas P. and Maxwell, John W., Quality Leadership When Regulatory Standards are Forthcoming. Available at SSRN: https://ssrn.com/abstract=234609

Stefan Lutz (Contact Author)

Lutz-Econ ( email )

Ringstrasse 6
Gernsheim, Hessen 64579
Germany
+4915146672069 (Phone)

HOME PAGE: http://lutz-econ.de

HMKW University ( email )

Department of Economics
Solmsstrasse 6
Frankfurt, Hessen 60486
Germany
+4915146672069 (Phone)

HOME PAGE: http://https://www.hmkw.de/

Thomas P. Lyon

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-615-1639 (Phone)

John W. Maxwell

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Department of Business Economics and Public Policy
Kelley School of Business, Indiana University
Bloomington, IN 47405
United States
812-855 9219 (Phone)
812-855 3354 (Fax)

HOME PAGE: http://johnwmaxwell.com

Indiana University, Department of Economics ( email )

Wiley Hall
Bloomington, IN
United States

Richard Ivey School of Business ( email )

The University of Western Ontario
1151 Richmond Street North
London, Ontario N6A3K7
Canada
5198502439 (Phone)
5198502306 (Fax)

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