Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

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Tuesday, July 31, 2012

Quality Competition and a Demand Spillover Effect: A Case of Product Differentiated Duopoly

Posted by D. Daniel Sokol

Tsuyoshi Toshimitsu (School of Economics, Kwansei Gakuin University) explores Quality Competition and a Demand Spillover Effect: A Case of Product Differentiated Duopoly.

ABSTRACT: Employing the price-quality competition model in a horizontally differentiated products market, we analyze how a demand spillover effect associated with upgrading the quality level of a product affects the strategic relationship between firms and the property of a subgame perfect Nash equilibrium. In particular, we show that the strategic relationship depends on the degree of a demand spillover effect. Then, we consider the cases of second-best policy and cooperative quality choice. Furthermore, we illustrate that there exists a natural Stackelberg equilibrium under asymmetric demand spillover effects that is Pareto superior to other equilibria. Finally, we examine an optimal policy with international R&D rivalry.

http://lawprofessors.typepad.com/antitrustprof_blog/2012/07/quality-competition-and-a-demand-spillover-effect-a-case-of-product-differentiated-duopoly.html

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