Quality Competition and Social Welfare in Markets with Partial Coverage: New Results

15 Pages Posted: 6 Nov 2005

See all articles by Gregory S. Amacher

Gregory S. Amacher

Virginia Polytechnic Institute & State University - Department of Forestry

Erkki Koskela

University of Helsinki - Department of Political and Economic Studies; CESifo (Center for Economic Studies and Ifo Institute); Bank of Finland - Research Department; IZA Institute of Labor Economics

Markku Ollikainen

University of Helsinki - Department of Political and Economic Studies

Abstract

We use a vertical product differentiation model under partial market coverage to study the social welfare optimum and duopoly equilibrium when convex costs of quality provision are either fixed or variable in terms of production. We show the following new results. First, under fixed costs, the social planner charges a uniform price for the single variant that just covers costs of quality provision. Like the duopoly equilibrium, this socially optimal pricing entails a partially uncovered market, but a smaller share of the market is served compared with the duopoly equilibrium. Second, for the variable cost case, it is socially optimal to provide both high- and low-quality variants, but market shares need not be equal. This differs from the result in fully covered markets. Third, in the duopoly equilibrium, the quality spread is too wide under variable costs relative to the social optimum. Under fixed costs, the duopoly produces two variants, but quality is too low relative to the social optimum, which has only one variant.

Suggested Citation

Amacher, Gregory S. and Koskela, Erkki and Ollikainen, Markku, Quality Competition and Social Welfare in Markets with Partial Coverage: New Results. Bulletin of Economic Research, Vol. 57, No. 4, pp. 391-405, October 2005. Available at SSRN: https://ssrn.com/abstract=825171

Gregory S. Amacher (Contact Author)

Virginia Polytechnic Institute & State University - Department of Forestry ( email )

307 Cheatham Hall
Blacksburg, VA 24061
United States

Erkki Koskela

University of Helsinki - Department of Political and Economic Studies ( email )

P.O. Box 54
FIN-00014 Helsinki
Finland
+358 9 191 8894 (Phone)
+358 9 191 8877 (Fax)

HOME PAGE: http://www.cesifo.de/servlet/page?_pageid=56&_dad=portal30&_schema=PORTAL30&pa_id=7298

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Bank of Finland - Research Department ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Markku Ollikainen

University of Helsinki - Department of Political and Economic Studies ( email )

P.O. Box 54
FIN-00014 Helsinki
Finland

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