Reduced Quality and an Unlevel Playing Field Make Consumers Happier

34 Pages Posted: 22 Oct 2000

See all articles by Nahum D. Melumad

Nahum D. Melumad

Columbia Business School - Accounting, Business Law & Taxation

Amir Ziv

Columbia Business School

Date Written: October 1, 2000

Abstract

We study a model of imperfect competition and limited production capacity, in which a choice of low product quality enables firms to increase total production. We find that in the presence of limited capacity, such reduced quality often results in increased social welfare.

We also explore the relation between the extent of competition and the choice of quality. We find that, in some cases, reduced competition leads to increased production, decreased average quality, increases total welfare, and makes consumers better off.

We next show that where the duopolists have different capacities, the small firm would always be willing to pay more than the large firm for an additional unit of capacity offered by an outside party. In contrast, a sale of a small capacity increment from the small to the large firm would sometimes increase total firms' profits.

Last, we consider the possibility of a regulator-mandated quality standards. We demonstrate that such an intervention could either increase or decrease welfare, in either a monopoly or a duopoly market.

JEL Classification: M40, M46

Suggested Citation

Melumad, Nahum D. and Ziv, Amir, Reduced Quality and an Unlevel Playing Field Make Consumers Happier (October 1, 2000). Available at SSRN: https://ssrn.com/abstract=244288 or http://dx.doi.org/10.2139/ssrn.244288

Nahum D. Melumad

Columbia Business School - Accounting, Business Law & Taxation ( email )

3022 Broadway
611 Uris
New York, NY 10027
United States
212-854-2475 (Phone)

Amir Ziv (Contact Author)

Columbia Business School ( email )

3022 Broadway, 704 Uris
New York, NY 10027 10027
United States
212 854-3485 (Phone)
212 253-4095 (Fax)

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