A Note on the Costs of Quality in Vertically Differentiated Duopoly

The literature on quality choice in vertically differentiated duopoly regularly assumes that either fixed costs or variable unit costs depend on quality. We analyze a generalized model where both types of costs are quality-dependent. Our findings are partially in contrast to the results obtained in the literature so far. In particular, the profit of the low-quality firm increases if variable unit costs increase for any level of quality. Hence, the low-quality firm has an incentive to engage in lobbying for governmental regulations that lead to rising variable costs of quality.

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Publication Details

Journal
Journal of Institutional and Theoretical Economics JITE
Published
2025-01-01
DOI
https://doi.org/10.1628/jite-2025-0029
Primary Topic
Merger and Competition Analysis
Type
article
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article

A Note on the Costs of Quality in Vertically Differentiated Duopoly

Peter Michaelis, Thomas Ziesemer
Journal of Institutional and Theoretical Economics JITE
Merger and Competition Analysis
article

A Note on the Costs of Quality in Vertically Differentiated Duopoly

Peter Michaelis, Thomas Ziesemer
article en

Abstract

The literature on quality choice in vertically differentiated duopoly regularly assumes that either fixed costs or variable unit costs depend on quality. We analyze a generalized model where both types of costs are quality-dependent. Our findings are partially in contrast to the results obtained in the literature so far. In particular, the profit of the low-quality firm increases if variable unit costs increase for any level of quality. Hence, the low-quality firm has an incentive to engage in lobbying for governmental regulations that lead to rising variable costs of quality.

Journal of Institutional and Theoretical Economics JITEVol. 181(2)
Openalex Percentile: Top 67%
Merger and Competition Analysis
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