Who's Number One? Asymmetric Production Costs as a Determinant of Quality Rankings
44 Pages Posted: 30 Apr 2007 Last revised: 24 Aug 2010
Date Written: August 22, 2010
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
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