Price and quality competition

Posted by D. Daniel Sokol

Ioana Chioveanuy (University College London - Econ) explains Price and quality competition.

ABSTRACT: This study considers an oligopoly model with simultaneous price and quality choice. Exante homogeneous sellers compete by offering products at one of two quality levels. The consumers have heterogeneous tastes for quality: for some consumers it is efficient to buy a high quality product, while for others it is efficient to buy a low quality product. In the symmetric equilibrium …firms use mixed strategies that randomize both price and quality, and obtain strictly positive pro…ts. This framework highlights trade-offs which determine the impact of consumer protection policy in the form of quality standards.