duopoly supergames with product differentiation abstract when goods are complements or very close substitutes more tacit collusion is supported by trigger strategies in price setting supergames than in quantity setting supergames for moderate or poor substitutes the situation is reversed this contrasts with the static situation where price setting strategies always lead to higher welfare

optimal r d policy and endogenous quality choice abstract in a quality differentiated duopoly where i quality is endogenously chosen before production ii fixed costs are increasing and convex in quality and iii variable production costs are insubstantial an r d subsidy for the firm producing a high quality product improves social welfare irrespective of whether the ensuing product market competition is bertrand or cournot while an r d subsidy for the firm producing a low quality product improves social welfare only if bertrand and not if cournot

how does income inequality affect market outcomes in vertically differentiated markets the distribution of consumer incomes is a key factor in determining the structure of a vertically differentiated industry when consumer s willingness to pay depends on his income this paper computes the shaked and sutton 1982 model for a general specification of consumers income distribution to investigate the effect of inequality on firms entry product quality and pricing decisions the main findings are that greater inequality in consumer incomes leads to the entry of more firms and results in more intense quality competition among the entrants this is due to the elasticity of consumer demand for quality being higher in more inegalitarian economies more intense quality competition among firms causes them to locate their products in higher ranges of the quality spectrum closer to each other decreasing the degree of product differentiation competition between more similar products tends to reduce their prices however when income inequality is very high the top quality producer chooses to serve only the rich segment of the market and the low price elasticity of demand of these consumers allows him to charge a higher price the conclusion is that income inequality has important implications for the degree of product differentiation price level industry concentration and consumer welfare

judo economics in markets with asymmetric firms abstract i study a market entry game with price competition and perfectly substitutable products limiting the initial capacity judo economics is a plausible entry strategy i show that under asymmetry in production cost or product quality capacity limitation can become obsolete

minimum quality standards with more than two firms abstract this paper studies the effects of introducing a minimum quality standard mqs in a vertically differentiated market it is shown that previous results indicating beneficial effects of a mqs heavily depend on the duopolistic set up they had been developed in an example with three firms is then provided showing that not all reaction functions in quality levels are increasing we also show that the introduction of the standard decreases the profit levels of all firms the maximum quality level and the average quality consumed as a consequence despite the increase in consumer surplus any effective mqs would reduce welfare

country asymmetries endogenous product choice and the timing of trade liberalization abstract we analyze the effects of trade liberalization on firms decisions and profits in a vertical product differentiation model with countries which have different characteristics firms decide product specifications at the beginning of the game in which autarky is followed by trade liberalization whose date is anticipated our analysis suggests that a firm located in a large or rich country is the likely market leader at the trade equilibrium this outcome might be reversed if small country firms have a strong cost advantage transport costs are negligible or if the large country opens its market before the small one

bidimensional vertical differentiation in markets where product quality is important more than one characteristic is usually necessary for producers to define product quality standard theory maintains that i in a duopoly there will be a quality leader no matter whether the product can incorporate one or two vertical attributes ii differentiation pertains only to one attribute by contrast in our set up there are also equilibria where the quality leader is better in two attributes and others where there is cross leadership namely a situation where each firm designs a product to dominate the other in one characteristic applications to minimum quality standards and tax subsidy on quality products are sketched showing spill over effects from one to the other quality dimension

optimal pricing and quality choice when investment in quality is irreversible this paper examines the price and quality choice of a single product risk neutral monopolist who can delay irreversible investments required for market entry it is shown that the price and quality she chooses at entry increase with uncertainty about the size of future demand in a stackelberg leader follower game the leader and follower pre commit immediately up to a certain level of uncertainty in this case the leader produces the higher quality good when uncertainty is higher than this threshold the follower will wait and enter the market later with a higher quality good

information goods vs industrial goods cost structure and competition we study markets for information goods and find that they differ significantly from markets for traditional industrial goods markets for information goods in which products are vertically differentiated lack the segmentation inherent in markets for industrial goods as a result a monopoly will offer only a single product competition leads to highly concentrated information good markets with the leading firm behaving almost like a monopoly even with free entry and without network effects we study how the structure of the firms cost functions drives our results this paper was accepted by barrie r nault information systems

better product at same cost lower sales and lower welfare we consider a high quality dominant firm facing a low quality competitive fringe we show that the dominant firm s quantity is weakly increasing in its quality if and only if its marginal cost weakly exceeds that of the fringe otherwise it is strictly decreasing in quality this result is driven by the fact that a quality increase causes the marginal revenue curve to rotate clockwise rather than shift outwards and at a height equal to the fringe firms marginal cost this fact combined with the dominant firm s mr mc condition determines the result for closely related reasons the effect of a quality increase on consumer welfare also depends on the relationship between the costs it is possible that all consumers are weakly better off that some are better off and some worse off or that all are weakly worse off we also consider several extensions and variations of the model

optimal tax policy under environmental quality competition this paper studies the socially optimal emission and commodity tax policy when consumers are willing to pay a price premium for environmentally friendlier variants of a commodity vertically differentiated in environmental quality the first best levels of quality can be obtained by a combination of a uniform ad valorem tax and an emission tax or a subsidy for buying green products the first best emission tax is higher than the social valuation of the positive externality associated with average environmental quality regardless of environmentally conscious consumers if only one instrument is available the second best emission tax is equal to the social valuation of the positive externality associated with average environmental quality a uniform ad valorem tax increases welfare only if the social valuation of the positive externality associated with average environmental quality is low enough

tariffs quality reversals and exit in vertically differentiated industries abstract in a vertically differentiated industry a domestic and a foreign firm first choose the quality of their goods and then compete in quantities or prices in the home market we investigate the cases in which a tariff is chosen before or after the firms quality decision these cases are referred to as the ex ante and the ex post game respectively optimal ex post tariffs are positive and ensure that the domestic firm always produces the high quality good the optimal ex ante tariff is prohibitive and welfare under domestic monopoly is lower than under ex post tariffs unless firms compete in prices and the domestic firm is high quality

credence attributes voluntary organizations and social pressure abstract credence attributes of products are unobservable through search or experience some consumers are willing to pay a premium for their provision and in addition citizens can apply social pressure on firms to supply credence attributes firms have formed voluntary organizations to assure the provision of credence attributes and the credible provision provides product differentiation this paper provides a theory of the voluntary provision of credence attributes in the presence of demand pull from consumers and social pressure from ngos where an organization chooses a credence standard and firms compete given the standard the credence standard is lower the larger the organization and social pressure results in a higher standard

natural resource economics and conservation contributions of agricultural economics and agricultural economists research by agricultural economists on natural resources has been distinguished by an interdisciplinary emphasis and a dynamic perspective it has recognized technological and institutional constraints has been oriented toward solving concrete resource management and policy problems and has emphasized empirical and quantitative analysis agricultural economists have introduced methods for evaluating natural resource conservation efforts for predicting adoption of resource conservation technologies and for designing efficient and sustainable resource management policies they have identified ways of improving land management and preventing land degradation proposed reforms of institutions governing water allocation and water quality and introduced policies for balancing environmental and efficiency considerations in the management of pests biodiversity and livestock diseases their research has had substantial impacts on the formulation of resource conservation policies

product quality and competition evidence from the broadband industry abstractaccess to high quality broadband internet is important in many different respects such as in communication education commerce and information acquisition we investigate the relationship

self selecting agri environmental policieswith an application to the don watershed we consider a model of regulation for nonpoint source water pollution through non linear taxation subsidization of agricultural production farmers are heterogenous along two dimensions their ability to transform inputs into final production and the available area they possess asymmetric information and participation of farmers to the regulation scheme put constraints on the optimal policy that we characterize we show that a positive relationship between size of land and ability may exacerbate adverse selection effects we calibrate the model using data on a french watershed and we simulate the optimal second best policy and characterize the allocation of the abatement effort among the producers

environmental tax in a green market we examine the impact of an emission tax in a green market characterized by consumers environmental awareness and competition between firms for both environmental quality and product prices the unique aspect of this model comes from the assumption that the cost for an increase in quality is fixed we show that the emission tax improves welfare thanks to a decline in pollution and despite an accentuation of product differentiation the higher the marginal environmental damage is the higher the optimal tax will be the optimal tax however becomes lower than the marginal damage when the market is not too large finally when marginal environmental damage is not too low the optimal tax leads to a green product monopoly

credence goods misleading labels and quality differentiation due to differences in information disclosure mechanisms consumer misinformation about the quality of many credence goods is more endemic at intermediate levels of the quality spectrum rather than at the extremes using an oligopoly model of vertical product differentiation we examine how consumers overestimation of the quality of intermediate quality products affects firms incentives to improve product quality the firms non cooperatively choose the quality of their product before choosing its price or quantity irrespective of the nature of second stage competition bertrand or cournot we find that quality overestimation by consumers increases profit of the intermediate quality firm and motivates it to raise its product s quality in response the high quality firm improves its product quality even further but ends up with lower profit overall average quality of the vertically differentiated product improves which raises consumer surplus social welfare increases when the firms compete in prices but falls when they compete in quantities

environmental policy in a green market this paper studies the impact of some frequently used environmental policies in a duopolistic market where purchasers are willing to pay more for less polluting goods when consumers differ in their environmental awareness a cleaner and a dirtier variant coexist in equilibrium the higher the average willingness to pay for the good the lower are variants unit emissions but the higher are industrial aggregate effluents a maximum unit emission standard reduces unit emissions of both variants but boosts firms sales and consequently increases industrial aggregate emissions as a result social welfare may be reduced we also explore the effects of technological subsidies and product charges including differentiation of charges

workers skills product quality and industry equilibrium in this paper we develop a model of a vertically differentiated industry where the production of higher quality goods needs a higher fraction of specialized labour in the first stage firms choose the quality of their products in the second both good prices and skilled workers wages are determined we show that in duopoly though supplying different variants of the product firms tend to cluster either at the bottom or at the top of the quality ladder depending on skilled labour availability this switch in equilibrium qualities creates a discontinuous behaviour for the wage rate of skilled workers when the supply of skilled labour is made endogenous two equilibria are simultaneously possible one with low skill low quality the other with high skill high quality

standards vs labels with imperfect competition and asymmetric information abstract i demonstrate that providing information about product quality is not necessarily the best way to address asymmetric information problems when markets are imperfectly competitive in a vertical differentiation model i show that a minimum quality standard which retains asymmetric information generates more welfare than a label which provides full information

quality and quantity competition in a multiproduct duopoly author affiliation yi ling cheng ylcheng thu edu twshin kun peng speng econ sinica edu tw acknowledgment we are most grateful to three anonymous referees who generously offered a number of insightful comments to improve this article we have also benefited much from fruitful discussions with takatoshi tabuchi hong hwang and toshihiro matsumura which led to significant improvements in this article we are especially indebted to takatoshi tabuchi for his contributive comments and suggestions finally we would like to thank conference participants at 2010 association for public economic theory in istanbul society for the advancement of economic theory in singapore as well as seminar participants at institute of economics academia sinica and national taiwan university financial support from academia sinica and the national science council taiwan is gratefully acknowledged the usual disclaimer applies 1 introductionmost of the literature dealing with vertical product differentiation such as bonanno 1986 and motta 1993 assumes that each firm can produce only one product however multiproduct firms abound in the real world firms in various industries produce multiple quality differentiated goods for example mercedes benz provides three different classes of sedans namely its c class e class and s class and bmw has its 3 series 5 series and 7 series in addition both lenovo and sony supply around 20 kinds of laptops ranked in accordance with their central processing units and outfits 1a casual survey of the empirical evidence also suggests that any two multiproduct oligopolies usually differentiate the qualities of their products and the patterns of their quality differentiation can be classified into the segmented type and the nonsegmented type the former type implies that the products of one firm are always of higher quality and more highly priced than those of the other firm such as the sedans of bmw and honda all the sedans sold by bmw are more expensive and of higher quality than those of honda the latter type denotes completely different patterns where the products produced by the two firms have interlacing patterns of their prices qualities for example the prices of the mercedes benz c e and s classes are respectively 32 900 52 700 and 87 800 while the prices of bmw s 3 5 and 7 series are given as 33 600 45 800 and 80 300 respectively 2 the prices of their sedans are interlaced and it is inferred that their qualities are interlaced and nonsegmented other examples include the whiskey offered by johnnie walker and edrington and the plasma televisions provided by samsung and sony the nonsegmented patterns of differentiation between the multiproduct firms with similar technological capabilities are very common in reality however the related literature has not shed enough light studying them while the segmented type of quality differentiation has been characterized by champsaur and rochet 1989 1990 with a quality then price competition of multiproduct duopolists the nonsegmented one so far has not been captured and explained in the literature 3therefore this article intends to examine the equilibrium qualities as well as the number of products chosen by the multiproduct firms with identical similar technological capabilities such as mercedes benz and bmw our main purpose is to characterize the patterns of vertical product differentiation and to reveal the properties of quality differentiation between them the contributive articles gal or 1983 de fraja 1996 johnson and myatt 2003 2006 examine a variety quality and quantity competition between multiproduct firms 4 gal or 1983 de fraja 1996 and johnson and myatt 2003 proposition 6 conclude that firms with equal technological capabilities will compete head to head by producing identical products qualities

environmental quality competition and taxation in the presence of green network effect among consumers we examine the impact of a green network effect in a market characterized by consumers environmental awareness and competition between firms in terms of both environmental quality and product prices the unique aspect of this model comes from the assumption that an increase in the number of consumers of green brown product increases the satisfaction of each green brown consumer we show that paradoxically when the network effect of a green product is higher than that of a brown product this externality reduces product environmental quality and raises consumption of the green product conversely when the network effect of the brown product is higher the externality improves product environmental quality and raises consumption of the brown product in both cases the network effect does not affect the overall pollution level the externality correction requires the use of three optimal fiscal policies an ad valorem tax on products an emission tax and a subsidy or a tax on the green purchase a second best optimum can also be reached through the green taxation

on production costs in vertical differentiation models abstract we analyze the effects of the introduction of a unit production cost in a vertical differentiation model with fixed costs of quality improvement for a low high unit cost a rise in cost reduces increases product differentiation and prices

strategic choice of quality when quality is costly the persistence of the high quality advantage in a two firm two stage model of vertical product differentiation i show that for every convex fixed cost function of quality the firm that chooses the higher quality at the first stage earns the higher profits the result holds for the pure strategy equilibrium in the simultaneous quality game and it holds as well if firms choose their qualities in sequential order

is ambiguity aversion bad for innovation abstract not necessarily i consider two firms that compete both on the research market and on the product market assuming the product market outcome is ambiguous i e uncertainty is described by multiple distribution of outcomes i show that an increase in firms ambiguity aversion increases the ex ante likelihood that they invest in r d an increase in their risk aversion on the other hand decreases innovation the result holds when the innovation has a business stealing effect as in a cournot duopoly with vertical differentiation the key intuition is that ambiguity aversion exacerbates the competitive threat whereas risk aversion diminishes the profit incentive to invest in addition to showing that an increase in ambiguity aversion leads to more projects being pursued i show that an increase in ambiguity aversion can lead to an increase in investment for incremental projects in the case of more radical projects an increase in ambiguity aversion can but not necessarily lead to lower investment in equilibrium overall ambiguity aversion has a positive effect on most innovative projects but can sometimes have a negative effect on some of the more radical game changing ones

strategic trade policy with endogenous choice of quality and asymmetric costs abstract this paper examines strategic trade and joint welfare maximizing incentives towards investment in the quality of exports by an ldc and a developed country firms first compete in qualities and then export to an imperfectly competitive third country market under bertrand competition unilateral policy involves an investment subsidy by the low quality ldc and an investment tax by the developed country whereas jointly optimal policy calls for the reverse so as to reduce price competition by increasing product differentiation under cournot competition unilateral policy is also reversed from the bertrand outcome but jointly optimal policy involves a tax in both countries

competitive search obfuscation abstract obfuscation is a literature term referring to sales practices which increase the costs consumers pay to search how does competition shape it how does it shape competition to address these questions we develop a model where each firm can freely commit to any observable degree of search obfuscation which pins down the time cost of searching its product consumers have limited time for browsing around websites this endogenizes consumer information and competition intensity and gives clear predictions about market welfare and surplus division we find that competition for prominence and the fear of frustrating consumers keeps the negative welfare effects of obfuscation low however because obfuscation reduces price awareness and differentiation relaxes price competition the obfuscation choices in the unique equilibrium are persistently positive and different

sunk costs and trade liberalization a model of vertical product differentiation is applied to the study of trade between two countries of differing sizes firms in the small country choose lower quality products in autarky unlike a shaked and j sutton 1984 welfare effects of trade are fully analyzed and shown to depend on the degree of sunkness of costs if firms have not sunk costs losses from trade may arise for the small country in the short run when quality is fixed and for the large country in the long run when quality is variable if costs are sunk both countries always gain from trade copyright 1992 by royal economic society

basis risk partial takedown and hedging by financial intermediaries in this paper we provide a model of futures market equilibrium in which both financial intermediaries and their customers are able to hedge both quantity and price risk the interplay between alternative loan commitment arrangements and hedging decisions is examined in some detail as an example we show conditions under which futures contracts can be used in conjunction with a particular loan pricing scheme to replicate another pricing mechanism by considering both input and output price uncertainty we argue that due to the built in hedge on their balance sheets the equilibrium hedge ratios for both firms and intermediaries is less than one that is a partial hedge this generalization also allows us to provide counterexamples to some commonly held beliefs concerning futures trading for example that hedgers would always want to avoid basis risk

dynamic pricing competition with strategic customers under vertical product differentiation we consider dynamic pricing competition between two firms offering vertically differentiated products to strategic customers who are intertemporal utility maximizers we show that price skimming arises as the unique pure strategy markov perfect equilibrium in the game under a simple condition our results highlight the asymmetric effect of strategic customer behavior on quality differentiated firms even though the profit of either firm decreases as customers become more strategic the low quality firm suffers substantially more than the high quality firm furthermore we show that unilateral commitment to static pricing by either firm generally improves profits of both firms interestingly both firms enjoy higher profit lifts when the high quality firm commits rather than when the low quality firm commits this paper was accepted by yossi aviv operations management

economic prescriptions for environmental problems how the patient followed the doctor s orders o ne of the dangers with ivory tower theorizing is that it is easy to lose sight of the actual set of problems which need to be solved and the range of potential solutions as one who frequently engages in this exercise i can attest to this fact in my view this loss of sight has become increasingly evident in the theoretical structure underlying environmental economics which often emphasizes elegance at the expense of realism in this paper i will argue that both normative and positive theorizing could greatly benefit from a careful examination of the results of recent innovative approaches to environmental management the particular set of policies examined here involves two tools which have received widespread support from the economics community marketable permits and emission charges pigou 1932 dales 1968 kneese and schultze 1975 both tools represent ways to induce businesses to search for lower cost methods of achieving environmental standards they stand in stark contrast to the predominant command and control approach in which a regulator specifies the technology a firm must use to comply with regulations under highly restrictive conditions it can be shown that both of the economic approaches share the desirable feature that any gains in environmental quality will be obtained at the lowest possible cost baumol and oates 1975 until the 1960s these tools only existed on blackboards and in academic journals as products of the fertile imaginations of academics however some countries have recently begun to explore using these tools as part of a broader strategy for managing environmental problems

competition under generalized attraction models applications to quality competition under yield uncertainty we characterize the equilibrium behavior in a broad class of competition models in which the competing firms market shares are given by an attraction model and the aggregate sales in the industry depend on the aggregate attraction value according to a general function each firm s revenues and costs are proportional with its expected sales volume with a cost rate that depends on the firm s chosen attraction value according to an arbitrary increasing function whereas most existing competition papers with attraction models can be viewed as special cases of this general model we apply our general results to a new set of quality competition models here an industry has n suppliers of a given product who compete for the business of one or more buyers each of the suppliers encounters an uncertain yield factor with a given general yield distribution the buyers face uncertain demands over the course of a given sales season the suppliers compete by selecting key characteristics of their yield distributions either their means their standard deviations or both these choices have implications for their per unit cost rates

incumbent positioning as a determinant of strategic response to entry existing research has identified different firm characteristics that determine an incumbent s reaction toward market entrants this study widens the perspective from a firm s absolute attributes to its relative positioning within its competitive environment the hypotheses for the empirical analysis are derived from game theoretic models with either vertical or horizontal product differentiation in each of the two theoretical models two incumbents initially choose very different quality and variety levels respectively and move closer to the center when faced by entry of a competitor from the vertical differentiation model we predict a stronger price reduction by high quality firms in our empirical analysis we are using a novel dataset of the high quality restaurant market in germany to test the theoretical findings while the hypotheses with respect to adjustments of prices and varieties are supported we do not find empirical evidence for the predicted quality adjustment

risky quality choice abstract in vertical product differentiation with a stochastic research technology firms should target their research at different quality levels for efficiency in a natural monopoly where the top firm finds it most profitable to sell to the whole market the incentives for risk taking and for firms to differentiate their targeted qualities are optimal in a natural oligopoly which results when there is sufficient dispersion of tastes the relationship between a firm s payoff and its quality improvement over other firms is weakened this diminishes the firms incentives to differentiate and the targeted qualities are too low and too close together

sequential versus simultaneous choice with endogenous quality abstract in this paper we examine how the timing of investment affects the levels of quality chosen by firms we show that in a model with vertical quality differentiation a game with sequential quality choice induces both firms to make smaller quality investments than they would in a game with simultaneous quality choice furthermore we show that while aggregate profit is higher both consumer and social surplus are lower under sequential quality choice

a dynamic model of quality competition with endogenous prices abstract we develop a dynamic model of price and quality competition in order to analyze the effects of competition on quality provision and to which extent an unregulated market is able to provide a socially optimal quality level our model combines a differential game approach with a hotelling spatial competition framework and our analysis applies in particular to industries such as long term care health care child care and education if providers nursing homes hospitals schools nurseries use closed loop decision rules which imply strategic interaction over time we show that although increased competition leads to higher quality in the steady state quality provision is nevertheless lower than under open loop rules and also suboptimally low from a welfare perspective thus our analysis identifies dynamic strategic interaction between competing providers as a potential source of inefficiency in quality provision

comparing cournot and bertrand equilibria in a differentiated duopoly with product r d abstract this paper compares bertrand and cournot equilibria in a differentiated duopoly with substitute goods and product r d i find that r d expenditure prices and firms net profits are always higher under quantity competition than under price competition furthermore output consumer surplus and total welfare are higher in the bertrand equilibrium than in the cournot equilibrium if either r d spillovers are weak or products are sufficiently differentiated if r d spillovers are strong and products are not too differentiated then output consumer surplus and total welfare are lower in the bertrand case than in the cournot case thus a key finding of the paper is that there are circumstances where quantity competition can be more beneficial than price competition both for consumers and for firms

limitations in evaluating environmental and agricultural policy coordination benefits agricultural policy has traditionally been concerned with the maintenance and stability of farm income and the provision of a stable food supply at low relative prices the food security act of 1985 was the first farm legislation to directly tie farm income and environmental concerns through the conservation reserve program conservation compliance sodbuster and swampbuster provisions the coordination of conservation and farm income policies contributed to commodity supply control by reducing the availability of arable land and it promoted environmental quality by removing some highly erodible land and wetlands from crop production a number of new environmental and food safety initiatives are also being enacted outside the agricultural policy process the most significant piece of legislation is the water quality act of 1987 designed to control

equilibrium vertical differentiation in a bertrand model with capacity precommitment both quality differentiation and capacity commitment have been shown to relax price competition however their joint influence on the outcome of price competition has not yet been assessed in this article we consider a three stage game in which firms choose quality then commit to capacity and finally compete in price when the cost of quality is negligible we show that firms do not differentiate their products in a subgame perfect equilibrium in other words capacity precommitment completely eliminates the incentive to differentiate by quality

financial planning where the firm s demand for funds is nonstationary and stochastic the incentive for a firm to engage in planning prearranging for its future financing derives from the interaction of uncertainty concerning the amount and timing of future needs and the cost of negotiating and terminating contracts in capital markets three conditions on relative costs and probability distributions are identified under which no financial slack should be raised if those conditions are not met then under one set of reasonable assumptions the optimum amount of slack will be more than the largest possible future need the model allows for surprises which can cause upward or downward in contrast to eoq models revisions in the future regarding the optimal level of slack to continue to carry

national treatment at the wto the roles of product and country heterogeneity this paper analyzes the world trade organization s wto s national treatment nt clause in a two country model where quality of goods and or market size are heterogenous across countries when market size is symmetric across countries a reciprocal nt agreement i benefits the high quality country ii hurts the low quality country and iii delivers higher aggregate world welfare however such an agreement can arise in equilibrium if the high quality country s market is relatively bigger and the quality gap between goods is small i e goods are sufficiently alike the qualitative nature of these results does not change when quality is endogenously determined

a comment on a model of vertical product differentiation in a duopoly model with vertical differentiation if the firms do not cover the market the lower quality firm chooses a quality level exactly 4 7 of that of the higher quality firm and chooses a price that is 2 7 of the price of the higher quality firm copyright 1992 by blackwell publishing ltd

uncoordinated agricultural and environmental policy making an application to irrigated agriculture in the west agriculture and the environment are linked by a mutual reliance on scarce resources and prevalent market distortions in this paper we examine the efficiency costs of policies that correct distortions in one sector while ignoring those in another the dual distortions of an environmental externality and water subsidies are studied in the context of irrigated agriculture in california the welfare costs associated with independent action by either a water agency or an environmental authority when that policy maker attempts to correct the respective market distortion without consideration of the distortion in the other market are estimated policies to correct the two distortions are found to be complementary under these conditions the independent correction of either distortion improves welfare by at least 118 per acre in most cases the simultaneous adoption of various second best policies further reduces welfare losses associated with these distortions

on the efficiency of bertrand and cournot equilibria with product differentation in a differentiated products setting with n varieties it is shown under certain regularity conditions that if the demand structure is symmetric and bertrand and cournot equilibria are unique then prices and profits are larger and quantities smaller in cournot than in bertrand competition and as n grows both equilibria converge to the efficient outcome at a rate of at least 1n if bertrand reaction functions slope upwards and are continuous then even with an asymmetric demand structure given any cournot equilibrium price vector one can find a bertrand equilibrium with lower prices in particular if the bertrand equilibrium is unique then it has lower prices than any cournot equilibrium

low quality leadership in a vertically differentiated duopoly with cournot competition abstract we model a vertically differentiated duopoly with quantity setting firms as an extended game in which firms noncooperatively choose the timing of moves at the quality stage to show that at the subgame perfect equilibrium sequential play obtains with the low quality firm taking the leader s role

on the economics of labels how their introduction affects the functioning of markets and the welfare of all participants are labels good or bad for consumers and firms the answer may seem straightforward since labels improve information yet economic theory reveals situations where their introduction reduces the welfare of at least some market participants this essay reviews the theoretical literature on labels in order to identify and explain the main reasons that may cause labeling to produce undesirable side effects in contrast to earlier reviews that either concentrate on narrow topics or treat the subject in a more or less informal way we bring together the main results from all the relevant topics by presenting and discussing the assumptions and model building techniques that underpin them the advantage of this approach is that it identifies the origin of the differences between results thus allowing the synthesis of results that sometimes appear even to be contradictory we focus on quality labels and examine the impact of labeling on market structure the side effects of costly certification issues related to the label s trustworthiness the rationale for mandatory vs voluntary labeling the level at which the label s standard is set according to the agency that selects it the political economy of labels that is pro or anti label lobbying lobbying to affect the label s standard and lobbying in favor or against the label s mandatory imposition these topics cover a wide range of applications including genetically modified organism gmos organic produce geographic indicators controlled origin eco labels etc we conclude by identifying topics that require further research

competing for low end markets recent business research points to the fortune awaiting to be tapped in low end markets in this paper we investigate how the size of the low end market influences a firm s profits and the pioneering firm s quality choice as low valuation consumers increase in a market on average consumers willingness to pay decreases this may lead us to expect firms profits to decrease as the size of the low end market increases our analysis shows that if the size of the low end market is below a threshold an increase in the size of the low end market may actually dampen price competition and improve profits as firms can then strategically choose their quality levels such that their products are more differentiated conventional wisdom also suggests that the pioneering firm will offer a higher quality product and earn more profits compared with the later entrant in contrast to this notion of quality advantage our analysis identifies circumstances in which a pioneer can offer a lower quality product and yet earn more profits an experimental test lends support for some of our model s predictions we further extend the model to consider markets with multiple firms firms with multiple products and consumers with limited purchasing power

quantity restrictions and endogenous quality choice abstract in a vertical product differentiation model under cournot competition both foreign and domestic firms respond by lowering their investment in long run quality for a quantity restriction at and in the neighborhood of the free trade import level average quality increases only when the low quality foreign firm faces a substantially restrictive quota voluntary export restraint the change in quality depends on whether the foreign firm is of high or low quality and upon the restrictiveness of the quota the imposition of quantity restrictions has important strategic effects on the long run choice of quality

strategic it investments the impact of switching cost and declining it cost the declining cost of information technology it over time provides the later entrant in information intensive industries a cost advantage on the other hand the earlier entrant has the potential to build and retain its market share if consumers incur a cost in switching to the later entrant we investigate the impact of a decline in the it cost and the switching cost on it investment strategies of firms we find that a declining it cost always hurts the early entrant s profit the early entrant may assume an aggressive investment strategy or a defensive investment strategy in response to a decline in the it cost depending on whether the switching cost relative to the extent of decline in the it cost is high or low respectively a decline in it cost also hurts the later entrant s profit if the switching cost is high a surprising result is that when the decline in the it cost is higher than a critical value a higher switching cost increases consumer surplus when firms control the switching cost the early entrant increases its investment in quality and switching cost and maintains its quality and its market share leadership irrespective of the extent of decline in the it cost

imperfect price discrimination in a vertical differentiation model abstract we explore the competitive implications of third degree price discrimination based on consumer information of varying degrees of precision in a vertical differentiation duopoly model we show that if the cost of information is below a threshold only the high quality firm will acquire it and offer targeted promotions while the low quality firm will commit to a uniform price for any degree of consumer information precision equilibrium profits of the high quality firm are monotonically increasing and that of the low quality firm monotonically decreasing as a function of the consumer information precision finally social and consumer welfare are monotonically increasing with respect to the precision of consumer information

optimal sequential futures trading hedgers adjust their futures market positions to reflect new information therefore the anticipation of new information creates future decision points and thus a multiperiod decision problem previous studies see 2 4 5 7 and 8 which solved the problem of choosing optimal futures market hedges have not addressed this issue rather these studies have derived optimal hedges in one period frameworks in general this solution is incorrect if during the time the hedge is in effect new information is anticipated

cross border travellers and parallel trade implications for asian economies this paper explores the impact of parallel trade in an export market by cross border travellers on welfare of the home country in a model with heterogeneous consumers perceptions we show that such parallel trade when it is organised trading always hurts the home country welfare however when parallel trade is unorganised trading it might benefit the home country welfare provided that the size of the export market is relatively small along these lines we suggest optimal policy responses in the home country to parallel trade by cross border travellers the results of the paper yield insightful policy implications for asian economies

certification and minimum quality standards when some consumers are uninformed we compare certification to a minimum quality standard mqs policy in a duopolistic industry where firms incur quality dependent fixed costs and only a fraction of consumers observe the quality of the offered goods compared to the unregulated outcome both profits and social welfare would increase if firms could commit to producing a higher quality an mqs restricts the firms quality choice and leads to less differentiated goods this fuels competition and may therefore deter entry a certification policy which awards firms with a certificate if the quality of their products exceeds some threshold does not restrict the firms quality choice in contrast to an mqs certification may lead to more differentiated goods and higher profits we find that firms are willing to comply with an ambitious certification standard if the share of informed consumers is small in that case certification is more effective from a welfare perspective than a minimum quality standard because it is less detrimental to entry

the contractual nature of the firm for their helpful comments i am grateful to armen a alchian yoram barzel keith leffler john s mcgee and dean worcester 1 ronald h coase the nature of the firm 4 economica 386 1937 the paper however was written several years earlier see note 3 infra 2 the social sciences citation index provides the following information breaking down the period of 1966 80 into three five year periods the total citations of coase s firm paper for each subperiod are 1966 70 17 citations 1971 75 47 citations and 1976 80 105 citations

endogenous quality choice price vs quantity competition two versions of a vertical product differentiation model one with fixed and the other with variable costs of quality are analyzed to study how the hypotheses of price versus quantity competition affect equilibrium solutions product differentiation arises under all the scenarios considered contrasting previous findings of symmetric quality choices under cournot behavior however to relax harsher market competition firms differentiate more under bertrand than under cournot a simple welfare measure also indicates that the economy is better off when firms compete on prices with fixed costs of quality not only consumer but also producer surplus is higher under price competition copyright 1993 by blackwell publishing ltd

time cost substitutability earlycutting threat and innovation timing with time cost substitutability a potential imitator could threat to earlycut the innovator by increasing experimental intensity the earlycutting threat or uncertainty about the potential imitator s experimental cost advantage usually drives down the new product s quality but advances its launching date

strategic patent breadth and entry deterrence with drastic product innovations abstract this paper examines the innovator s patent breadth decision that maximizes innovation rents when the innovation is drastic and there is potential entry by a superior quality product and a likelihood of patent challenge analytical results show that the innovator can use patent breadth to deter entry and in most cases entry deterrence can be accomplished with narrower rather than broader patent protection when entry cannot be deterred a narrow patent breadth can enhance product differentiation in a vertically differentiated product market

add on pricing by asymmetric firms this paper uses an analytical model to examine the consequences of add on pricing when firms are both horizontally and vertically differentiated and there is a segment of boundedly rational consumers who are unaware of the add on fees at the time of initial purchase we find that consumers who know the add on fees can be penalized and increasingly so by the existence of boundedly rational consumers our consideration of quality asymmetries on base goods and add ons plus the inclusion of boundedly rational consumers leads to several novel findings regarding firm profits when quality asymmetry is on base goods only and with boundedly rational consumers add on pricing can diminish profit for a qualitatively superior firm and increase profit for an inferior firm i e a lose win result compared to when add on pricing is prohibited or infeasible when quality asymmetries exist on both base goods and add ons and without boundedly rational consumers the opposite win lose result prevails when quality asymmetries exist on both base goods and add ons and with boundedly rational consumers the result can be win win win lose or lose win depending on the magnitude of quality differentiation on add ons this paper was accepted by j miguel villas boas marketing

personalized pricing and quality differentiation we develop an analytical framework to investigate the competitive implications of personalized pricing pp whereby firms charge different prices to different consumers based on their willingness to pay we embed pp in a model of vertical product differentiation and show how it affects firms choices over quality we show that firms optimal pricing strategies with pp may be nonmonotonic in consumer valuations when the pp firm has high quality both firms raise their qualities relative to the uniform pricing case conversely when the pp firm has low quality both firms lower their qualities although many firms are trying to implement such pricing policies we find that a higher quality firm can actually be worse off with pp while it is optimal for the firm adopting pp to increase product differentiation the non pp firm seeks to reduce differentiation by moving in closer in the quality space while pp results in a wider market coverage it also leads to aggravated price competition between firms because this entails a change in equilibrium qualities the nature of the cost function determines whether firms gain or lose by implementing such pp policies despite the threat of first degree price discrimination we find that pp with competing firms can lead to an overall increase in consumer welfare

cooperative r d and vertical product differentiation abstract a partial equilibrium model with vertical product differentiation coumot competition and quality determined by r d expenses is analysed cooperative agreements on r d entail higher levels of r d quality output and welfare than at the non cooperative equilibrium under well denned conditions on spillover rates this confirms in a new setting a well known outcome of models with cost reducing r d further cooperation in r d allows a larger number of firms to operate in the industry than in the non cooperative case via a reduction in prices a new source of social gains from cooperative research is identified

designing a family of development intensive products faced with fragmented markets saturated and demanding customers and global competition firms increasingly must design and offer a line of innovative quality differentiated products to target customers with differing willingness to pay wtp in this context designing a special class of products that we term development intensive products dips for which the fixed costs of development far outweigh the unit variable costspresents some unique managerial challenges examples of such development intensive offerings abound in a number of industries including the pharmaceutical information and entertainment sectors of the economy our contributions in this paper are threefold a to show that managerial insights from the traditional approach to product line design developed for unit variable cost intensive products do not carry over to dips b to present new mechanisms and managerial guidelines for designing a family of products for which development costs cannot be ignored and c to illustrate the insights with an extended industry example we find that the design approach based on degrading or subtracting value from a high end product to obtain a subsumed low end edition shown in the literature to be an effective approach for designing unit cost intensive products can be inappropriate for dips this limitation of value subtraction has implications for the number of variants and the sequence in which they are developed as an alternative to a subsumed product design strategy we propose and examine the overlapped product design approach in which a low end product is not completely subsumed within its high end counterpart but differentiated on additional vertical quality dimensions our results both explain the recent challenges of firms with subsumed low end products and guide them in designing a product line to successfully address emerging low end market segments

uniform and non uniform second best input taxes we investigate second best input based taxes foragricultural nonpoint pollution control when marketprices are endogenous and production isheterogeneous theoretically we derive the optimalforms of taxes which take account of heterogeneity non uniform taxes and a tax which does not auniform tax empirically we use a multi factor market equilibrium simulation model to determineoptimal tax rates and associated equity effects particularly differences in landowner gains lossesacross a heterogeneous region when market prices areendogenous second best tax policies result inpecuniary externalities that affect existingenvironmental externalities in particular thepecuniary externalities amplify the effect of producerheterogeneity on determination of sub regionaldifferences in tax rates and returns to land particularly for the uniform policy with endogenousprices the uniform tax rate is considerably higherthan any of the non uniform rates and ironically thenon uniform taxes result in less dispersion oflandowner gains across sub regions than the uniformtax

fixed rate loan commitments take down risk and the dynamics of hedging with futures this paper develops a normative model to analyze the hedging and fee pricing decisions of a financial institution supplying fixed rate loan commitments to its customers in supplying fixed rate loan commitments the financial institution hereafter referred to as bank is assumed to act as an agent that transforms commitment risk through the use of financial futures contracts while most pre vious loan commitment models have analyzed the interest rate or price risk the bank faces in supplying fixed rate loan commitments they either have ignored or assumed away the loan take down or quantity risk l in general by making a formal fixed rate loan commitment the bank exposes itself to both a price and a quantity risk specifically a formal loan com mitment prespecifies the maximum size of the loan the purpose of the loan of ten project specific as well as the interest rate and fee to be paid by the borrower 14 15 however while a formal loan commitment imposes a contractual re quirement on the bank to supply funds up to a maximum amount at an agreed rate of interest the expected size of the loan to be taken down is often uncertain the reason is that for project specific lines of credit the amount taken down will depend on the future state s of the world that are revealed to the borrower at the end of the commitment period as well as on the limitations and constraints im posed on the use of funds in the loan commitment contract for example construction delays and other market imperfections that hamper a planned invest

valuing satellite systems to support fishing in a dynamic competitive model this article investigates the technology adoption decision of a new satellite system aimed at locating tuna shoals we propose a dynamic imperfect competition model with vertical differentiation in which each firm acts as a cournot oligopolist and takes the evolution of the natural resource into account in this dynamic setting the model cannot be solved analytically and we rely on a numerical approach results are derived for the northern bluefin tuna we find that high quality firms value more the technology than low quality firms a direct implication of this result is that the market value of the new technology can be maximized while serving only the highest quality firms we then evaluate how individual quotas can be used to increase the value that firms attach to the technology

monopolistic third degree price discrimination under vertical product differentiation this paper shows in a vertical product differentiation model with variable costs of quality that monopolistic third degree price discrimination always reduces welfare regardless of whether the quality is fixed or is endogenous the results provide rich implications for antitrust policy

trade policy and quality leadership in transition economies trade policy and quality leadership in transition economies are analyzed in a duopoly model of trade and vertical product differentiation we first show that the incidence of trade liberalization is sensitive to whether firms in transition economies are producers of low or high quality second we find that neither free trade nor the absence of a domestic subsidy are optimal both a tariff and a subsidy increase price competition and while the former extracts foreign rents the latter results in quality upgrading third there exists a rationale for a government to commit to a socially optimal policy to induce quality leadership by the domestic firm when cost asymmetries are low finally we establish an equivalence result between the effects of long run exchange rate changes and those of trade policy on price competition but not on social welfare

exit with vertical product differentiation abstract this paper presents a duopoly model of exit from a declining industry with vertical product differentiation it extends previous io models on exit that have so far ignored demand effects the model shows how the interplay between demand and technological factors determine the order of exit therefore demand factors are relevant and should be taken into account thus the firm with a longer tenure as a profitable monopolist does not necessarily outlast its rival in addition this paper argues that the low quality firm may find it optimal to stay in the market despite making temporary losses to outlast its rival