Price Versus Quantity: Market Clearing Mechanisms When Sellers Differ in Quality

41 Pages Posted: 6 Nov 1996  

Richard J. Zeckhauser

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Andrew Metrick

Yale School of Management; National Bureau of Economic Research (NBER)

Date Written: August 1996

Abstract

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.

Suggested Citation

Zeckhauser, Richard J. and Metrick, Andrew, Price Versus Quantity: Market Clearing Mechanisms When Sellers Differ in Quality (August 1996). NBER Working Paper No. w5728. Available at SSRN: https://ssrn.com/abstract=4399

Richard J. Zeckhauser (Contact Author)

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Harvard University - Harvard Kennedy School (HKS) ( email )

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Andrew Metrick

Yale School of Management ( email )

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National Bureau of Economic Research (NBER) ( email )

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