Who's Number One? Asymmetric Production Costs as a Determinant of Quality Rankings

44 Pages Posted: 30 Apr 2007 Last revised: 24 Aug 2010

See all articles by Sergio Meza

Sergio Meza

University of Guelph

Mihkel M. Tombak

University of Toronto; University of Toronto

Date Written: August 22, 2010

Abstract

We examine how production cost asymmetries affect the way firms compete in prices and quality in a vertical differentiation model. By introducing such asymmetries in marginal costs we obtain an endogenously determined quality ranking. We find that with cost differences, quality differentials decrease, and that when cost differences grow large enough, we have a unique duopoly equilibrium where the low-cost firm offers high quality. We illustrate the robustness of these results to different costs of quality formulations. We then conduct a welfare analysis and discuss implications for R&D, trade, as well as for setting quality standards and competition policies.

Keywords: asymmetric costs, vertical differentiation, quality ranking

JEL Classification: L11, L15

Suggested Citation

Meza, Sergio and Tombak, Mihkel M., Who's Number One? Asymmetric Production Costs as a Determinant of Quality Rankings (August 22, 2010). Available at SSRN: https://ssrn.com/abstract=982867 or http://dx.doi.org/10.2139/ssrn.982867

Sergio Meza

University of Guelph ( email )

Guelph, Ontario
Canada

Mihkel M. Tombak (Contact Author)

University of Toronto ( email )

105 St George Street
Toronto, Ontario M5S 3E6 M5S 3G8
Canada

University of Toronto ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
9054837877 (Phone)