Endogenous Quality Choice: Price vs. Quantity Competition

TLDR

The study analyzes two versions of a vertical product differentiation model—one with fixed and one with variable costs of quality—to examine how price versus quantity competition hypotheses affect equilibrium solutions. The authors compare these models to assess the impact of price and quantity competition on equilibrium outcomes. Product differentiation occurs in all scenarios, with firms differentiating more under Bertrand than Cournot, and welfare is higher under price competition with fixed quality costs, benefiting both consumers and producers. © 1993 Blackwell Publishing Ltd.

Abstract

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.