Product Quality and Market Size

38 Pages Posted: 11 May 2003

See all articles by Steven Berry

Steven Berry

Yale University - Department of Economics; National Bureau of Economic Research (NBER); Yale University - Cowles Foundation

Joel Waldfogel

University of Minnesota - Twin Cities - Carlson School of Management; National Bureau of Economic Research (NBER); University of Minnesota - Twin Cities - Department of Economics

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Date Written: May 2003

Abstract

Recent literature notes that when quality is produced with fixed costs, a high quality firm can undercut its rival's prices and may find it profitable to invest more in quality as market size grows large. As a result, a market can remain concentrated even as it grows large. When quality is produced with variable costs, by contrast, a wide range of product qualities can coexist in the market because they are offered at different prices. Larger markets will fragment and offer products with a wider range of qualities. Using US urban areas as markets, we examine the relationships between market size and product quality - and between market size and product concentration - for two industries that differ in their quality production process. We document that in the restaurants industry, where quality is produced largely with variable costs, the range of qualities on offer increases in market size, with each product maintaining a small market share. In daily newspapers, where quality is produced with fixed costs, the average quality of products increases with market size, and the market does not fragment as it grows large.

Suggested Citation

Berry, Steven T. and Waldfogel, Joel, Product Quality and Market Size (May 2003). NBER Working Paper No. w9675, Available at SSRN: https://ssrn.com/abstract=406047

Steven T. Berry (Contact Author)

Yale University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Yale University - Cowles Foundation

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Joel Waldfogel

University of Minnesota - Twin Cities - Carlson School of Management ( email )

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National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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University of Minnesota - Twin Cities - Department of Economics ( email )

271 19th Avenue South
Minneapolis, MN 55455
United States

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