On the Robustness of the High-Quality Advantage under Vertical Differentiation

Author: Schmidt, Robert

Source: Journal of Industry, Competition and Trade, Volume 6, Numbers 3-4, December 2006 , pp. 183-193(11)

Publisher: Springer

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Abstract:

The idea that the high-quality provider in a vertically differentiated duopoly earns the higher profit (the so-called “high-quality advantage”) appears to be an established fact among economists. This note shows that the high-quality advantage is not a robust feature of vertical differentiation models. A low-quality advantage can be predicted under perfectly plausible assumptions, such as a concave utility-quality and/or a convex unit cost-quality relation. The existence of a high- or a low-quality advantage depends on the nature of the firms' strategic interaction.

Keywords: vertical differentiation; high-quality advantage; maximum differentiation; covered market equilibrium; non-linearity; L13; L15

Document Type: Research article

DOI: http://dx.doi.org/10.1007/s10842-006-0029-8

Affiliations: 1: Email: robert.schmidt.1@staff.hu-berlin.de

Publication date: 2006-12-01