Monday, July 12, 2010
Posted by D. Daniel Sokol
Constantine Angyridis and Debapriya Sen (both Ryerson University) describe Relative and Absolute Preference for Quality.
ABSTRACT: This paper seeks to explain two related phenomena: (i) it is often the case that when the new variety of a product is launched, some consumers do not purchase the latest variety and (ii) the quality of the latest variety of a product is often not significantly superior compared to the existing variety. We consider a simple model of monopoly with two types of consumers: "regular" (type R) who cares only about the absolute quality of the product and "fastidious" (type F) who cares about the relative quality vis-a-vis the existing variety. We show that it is never optimal for the monopolist to exclusively serve type F. Moreover, we identify situations where although it is optimal for the monopolist to upgrade the quality of the product, this upgrade is not sufficient to meet the standards of type F. As a result, only type R buys the upgraded variety while type F chooses not to buy it.