Antitrust & Competition Policy Blog

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

Thursday, September 20, 2012

Quality Improvement to Meet Competitive Fringe

Posted by D. Daniel Sokol

Noriaki Matsushima, Osaka University - Institute of Social and Economic Research and Ren-Jye Liu, Industrial Engineering and Enterprise Information, Tunghai University explore Quality Improvement to Meet Competitive Fringe.

ABSTRACT: We investigate what kind of competitive pressure induces existing firms to engage in more intensive innovation activities. We examine two types of competitive pressure: a price decrease in competitive fringe firms and a quality improvement therein. We use an oligopoly model with vertical differentiation to investigate this question. We show that a decrease in the exogenous price of competitive firms induces the two existent leading firms (one high-quality firm and one mid-quality firm) to engage in quality investments more if the ex ante quality level of the high quality product is large enough; otherwise, only the mid-quality firm engages more in quality investment. We also show that an increase in the exogenous quality level of competitive firms diminishes the incentive of the mid-quality firm to engage in quality investments.

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