Working Paper: NBER ID: w5728
Authors: Andrew Metrick; Richard Zeckhauser
Abstract: High-quality producers in a vertically differentiated market can reap superior profits by charging higher prices, selling greater quantities, or both. If qualities are known by consumers and production costs are constant, then having a higher quality secures the producer both higher price and higher quantity; if marginal costs are rising, having a higher quality assures only higher price. If only some consumers can discern quality but others cannot, then high- and low-quality producers may set a common price, but the high-quality producer will sell more. In this context, quality begets quantity. Empirical analyses suggest that in both the mutual fund and automobile industries, high-quality producers sell more units than their low-quality competitors, but at no higher price (or markup) per unit.
Keywords: Market Clearing; Quality Differentiation; Duopoly; Consumer Information
JEL Codes: D43; D82; L15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| product quality (L15) | quantity sold (C69) |
| high-quality producers (L15) | quantity sold (C69) |
| consumer perception of quality (L15) | quantity sold (C69) |
| quality influences quantity sold (L15) | price competition (D41) |
| high-quality producers (L15) | superior profits (D33) |