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The IUP Journal of Managerial Economics
Minimum Quality Standards with More Than Two Firms Under Cournot Competition
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This paper presents a study of the effects of the introduction of a Minimum Quality Standard (MQS) in a vertically differentiated market in which three identical firms compete in quantities in the short run and face quality-dependent fixed costs. In contrast to what has been shown under the assumption of Bertrand triopolistic competition (Scarpa, 1998), the introduction of an MQS has a positive effect on the average provision of quality.

 
 
 

In a vertically differentiated market in which consumers have varying willingness to pay for quality, firms can relax price competition by differentiating the quality of their products. Governments may want to regulate quality to reduce the distortion that vertical differentiation produces on prices and market provision of quality.

Examples of Minimum Quality Standard (MQS) include product safety standards for manufactured products,1 contents requirements for food and pharmaceuticals, and environmental standards (following the ongoing debate in Europe on environmental issues, the European Parliament recently reached an agreement with the European Union Council of Ministers on the text of a new directive on air quality,2 which will become effective in 2011).

The model analyzes the effects of the introduction of an MQS in a vertically differentiated market in which three identical firms play a two-stage quality/quantity game. We assume in particular that firms face quality-dependent fixed costs. In what follows, we refer to the framework which has been proposed initially by Mussa and Rosen (1978) and analyzed in detail by Motta (1993). Shaked and Sutton (1982 and 1983) show that under a similar framework, when quality-dependent costs are only fixed (or at least unit cost for quality enhancement rise sufficiently slowly with quality), there is an upper bound to the number of firms that can coexist in the market (finiteness property).

 
 
 

Managerial Economics Journal, Minimum Quality Standard, MQS, Consumer Surplus, CS, Unregulated Equilibrium, First Order Conditions, FOCs, Marginal Revenues, Duopolistic Competition, Regulator by Consumers, Fixed Quadratic Costs.