Tuesday, December 22, 2020
We provide a framework of analysis for models of imperfect competition when firms compete in quality as well as in another instrument (either price or quantity). The equilibrium can notably be characterized through a quality parameter, which depends on firms' diversion ratios. Extending the monopoly analysis of Spence (1975), we find that, together with the change in the marginal value of quality as the absolute willingness-to-pay falls, our quality parameter is the key determinant of quality distortions under imperfect competition. We also use our framework to analyze the effects of technology shocks and commodity taxes, as well as horizontal mergers. Our approach encompasses several standard models of imperfect competition, and we provide various extensions to our baseline model.