Price Versus Quantity: Market Clearing Mechanisms When Sellers Differ in Quality
Richard J. Zeckhauser
Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)
Yale School of Management; National Bureau of Economic Research (NBER)
NBER Working Paper No. w5728
High-quality producers in a vertically differentiated market can reap superior profits by charging higher prices, selling greater quantities, or both. If qualities are known by consumers and production costs are constant, then having a higher quality secures the producer both higher price and higher quantity; if marginal costs are rising, having a higher quality assures only higher price. If only some consumers can discern quality but others cannot, then high- and low-quality producers may set a common price, but the high-quality producer will sell more. In this context, quality begets quantity. Empirical analyses suggest that in both the mutual fund and automobile industries, high-quality producers sell more units than their low-quality competitors, but at no higher price (or markup) per unit.
Number of Pages in PDF File: 41
Date posted: November 6, 1996