Minimum Quality Standards, Entry, and the Timing of the Quality Decision

This paper examines the effects of the imposition of minimum quality standards (MQS) on a vertically differentiated natural duopoly with free entry. It is shown that the welfare effects of MQS are crucially dependent upon the timing of the quality choice with respect to the decision to enter the market. If irreversible decision to enter is taken without pre-commitment to a specific quality level then a welfare improving MQS always exists. If, however, a firm's product quality must be decided prior to entry then a MQS is either redundant or counterproductive, since it can induce a monopoly.     

Strategic Entry Deterrence by Limiting Qualities under Minimum Quality Standards

We consider a minimum quality standard (MQS) regulation under a vertically differentiated duopoly model where an incumbent may deter entry by limiting qualities, and explicity examine the strategic interaction between entry cost and a limit quality. We show that MQS will increase social welfare in most cases by reducing the incentive of the incumbent to limit quality, but it might render industry entry unprofitable for the entrant, which could induce predation to deter entry.     

Minimum quality standards and consumers’ information

The literature so far has analyzed the effects of minimum quality standards (MQS) in oligopoly, using models of pure vertical differentiation, with only two firms, and perfect information. We consider products that are differentiated horizontally and vertically, with imperfect consumers’ information, and more than two firms. We show that a MQS changes the consumers’ perception of produced qualities. This increases the firms’ returns from quality enhancing investments, notwithstanding contrary strategic effects. Our analysis justifies the use of MQS in industries where consumers cannot precisely ascertain the quality of goods, for instance pharmaceuticals or products with chemical components involved. Paper presented at the 2004 ASSET conference in Barcelona, and at the 2005 EARIE conference in Porto. The authors wish to thank an anonymous referee for helpful suggestions.     

A dynamic perspective on minimum quality standards under Cournot competition

Imposing a minimum quality standard (MQS) is conventionally regarded as harmful if firms compete in quantities. This, however, ignores its possible dynamic effects. We show that an MQS can hinder collusion, resulting in dynamic welfare gains that reduce and may outweigh the static losses which are caused by regulation’s distortive effect on equilibrium qualities.     

提高最低质量标准真的能够增进社会福利吗*

本文通过构建基于纵向质量差异的双寡头竞争模型，分析了最低质量标准政策对质量提升的作用机制及其福利影响。研究结果显示，最低质量标准政策的效果会极大地受到企业之间技术差距和政府监管效率的制约，并且对不同企业会产生差异化的影响。在国内外企业存在较大技术差距的背景下，政府在实施最低质量标准政策时会遭遇降低质量标准或者放松监管的两难困境，并且会在生产者和消费者，以及不同的厂商之间产生利益冲突。解决上述问题的关键在于提升监管效率的同时，缩小国内外企业之间的技术差距。     

Quality certification standards in competitive markets: When consumers and producers (dis)agree

A quality certification standard in a competitive setting can improve welfare but may affect consumers and producers differently. In a competitive model with quality preferences of the vertical product differentiation type, we find that producers prefer a higher (lower) quality standard than consumers if individual demand functions are log-convex (log-concave).     

Efficiency properties of binary ecolabeling

We investigate efficiency properties of binary ecolabels in a homogeneous good market with heterogeneous consumers. Faced with the minimum technology standard, firms make endogenous entry, certification, and price/quantity decisions. We consider both perfect and imperfect competition with or without sunk fixed costs. Our findings are as follows. Ecolabeling alone does not achieve the first-best outcome and, to achieve the second best, may need to set the standard less strict than the efficient level. Without sunk fixed costs, ecolabeling can achieve the first-best outcome provided that both the technology standard and the complementary pollution tax are set at efficient levels. With sunk fixed costs, however, differential excise taxes that would restore allocative efficiency induce more entry than optimal, and thus, can be even welfare decreasing relative to no tax outcome. Tightening the technology standard may ameliorate such an adverse effect of the corrective tax system by reducing excessive entry and pollution per output by the certified firms.     

The welfare effects of entry: the role of the input market

In a successive Cournot oligopoly, we show the welfare effects of entry in the final goods market with no scale economies but with cost difference between the firms. If the input market is very concentrated, entry in the final goods market increases welfare. If the input market is not very concentrated, entry in the final goods market may reduce welfare if the entrant is moderately cost inefficient. Hence, entry in the final goods market is more desirable if (1) the input market is very concentrated or (2) the cost difference between the incumbents and the entrant is either very small or very large. It follows from our analysis that entry increases the profits of the incumbent final goods producers if their marginal costs are sufficiently lower than the entrant’s marginal cost.     

Minimum quality standard regulation under imperfect quality observability

Minimum quality standards (MQS) constitute an important regulatory tool that can be used to raise product qualities, to benefit consumers and to increase market participation. One of the main assumptions in the existing literature is that firms must comply with standards. Nevertheless, in many industries, and in particular the service industry, quality observability and enforceability are not perfect. Some low quality firms do not comply with standards. What are the welfare implications of an MQS regulation in such an environment? We develop a price competition model of vertical differentiation that accounts for these empirical observations. Contrary to well-established results in the literature, MQS can increase quality disparity between firms and raise hedonic prices. Some consumers get hurt and market participation decreases.     

Interfirm Bundling and Vertical Product Differentiation

In this paper, we study the competitive effects of bundled discounts offered by pairs of independent firms. In a setting with vertically differentiated goods, where firms decide whether to participate in a discounting scheme before prices are set, it is shown that, in equilibrium, all pairs of firms producing goods of the same quality level offer bundled discounts. Relative to the no‐bundling benchmark, we find that (i) all headline prices rise, (ii) all bundle prices, net of the respective discount, decrease, and (iii) only high‐quality sellers will obtain higher profits. Furthermore, this equilibrium corresponds to the worst scenario in terms of consumer welfare, and it and decreases social welfare.     

Tax Competition in Vertically Differentiated Markets with Environmentally Conscious Consumers

This paper analyses the effects of tax competition on environmental product quality, pollution and welfare in a two-country, vertically differentiated, international duopoly, in which consumers are environmentally conscious. The firm in each country chooses first the environmental quality of its product (which reflects the emissions generated in the production process) and then the price. In equilibrium one country will be more polluted than the other because firms choose different levels of environmental quality of their products. We find that a country’s optimal commodity tax is higher if the domestic firm is the more polluting supplier. Furthermore, non-cooperative commodity tax rates are inefficiently high in equilibrium. This is because, in this framework with environmentally aware consumers, commodity taxes affect the choice of firms regarding their emissions. Therefore, a domestic tax reduction not only raises the profits of the foreign firm but also lowers its emission levels, resulting in higher welfare for the other country. We also analyse the optimal cooperative and non-cooperative commodity and emission taxes with border tax adjustments. With these two policy instruments available, commodity taxes are higher.     

企业社会责任标准国际化背景下企业进入策略研究*

本文通过构建博弈模型，对企业社会责任（CSR）标准国际化背景下企业进入策略进行研究。本文发现，企业最优进入策略受到进入成本影响，当进入成本较低时所有企业都适合选择进入高CSR标准市场，当进入成本较高时所有企业都不适合选择进入，当成本介于两者之间时适合部分企业选择进入。在对社会福利的分析中还发现，当进入是企业最优策略时，无论是部分进入还是全部进入，企业承担更高的社会责任能同时提升企业利润和社会福利水平。     

Minimum Quality Standards and International Trade

This paper investigates the impact of a non‐discriminating minimum quality standard (MQS) on trade and welfare when the market is characterized by imperfect competition and asymmetric information. A simple partial equilibrium model of an international Cournot duopoly is presented in which a domestic and a foreign firm are identical except that the foreign firm faces positive transport costs. Asymmetric information generates a market failure, which the government attempts to alleviate with a MQS. It is found that although firms face the exact same costs of compliance, they will generally prefer different levels of regulation. As a result, international trade disputes are likely to arise even when regulation is non‐discriminating.     

Should Mobile Marketers Collect Data Other Than Geo‐Location?*

We take today's mobile marketing data landscape as a starting point and consider a duopoly model of third‐degree price discrimination in which firms can complement geo‐location information with data on consumer flexibility of varying quality. We show that, depending on consumer heterogeneity, higher‐quality flexibility data affect profits according to three different patterns. In equilibrium, both firms tend to acquire data if the data are of high quality, while only one acquires data if the data quality is low. Firms are likely to gain from additional data if consumers have similar preferences and/or when data are precise. Although social welfare (weakly) improves, consumers can be harmed.     

Managerial risk-taking incentives, product market competition and welfare

Managers’ compensation may increase with the variance of the firm's profits. This paper investigates how this affects their choice of strategic variables, and how that affects managerial compensation. The social welfare aspects of this interaction are analyzed in a duopoly setting with uncertain linear demand and linear marginal cost. Compared to a situation in which the managers’ compensation does not depend on the variance of profits, social welfare may be either higher, lower, or remain unaffected, depending on the slope of the marginal cost curve and whether the competing firms produce goods that are demand substitutes or complements.     

Price and quantity competition under free entry

This paper complements that of Cellini et al. (Cellini, R., Lambertini, L., Ottaviano, G. I. P., 2004. Welfare in a differentiated oligopoly with free entry: A cautionary note. Research in Economics, 58:125–33.), which shows that Cournot competition may generate higher welfare compared to Bertrand competition in an economy with free entry. Unlike them, we provide a more general proof for this result and show that Cournot competition generates higher welfare compared to Bertrand competition when the products are sufficiently differentiated. If the products are close substitutes, welfare is higher under Bertrand competition. We show that these qualitative results hold whether or not number of varieties increases market size. We also show when the active firms earn higher profits under Bertrand competition compared to Cournot competition.     

‘Just one of us’: consumers playing oligopoly in mixed markets

Consumer cooperatives represent a highly successful example of democratic form of enterprises operating in developed countries. They are usually medium to large-scale companies competing with the profit-maximizing firms in the retail sector. This paper describes this situation as a mixed oligopoly in which consumer cooperatives maximize the utility of consumer-members and, in return, refund them with a share of the profits corresponding to the ratio of their individual spending to the cooperative’s total sales. We show that when consumers possess quasi-linear preferences over a bundle of symmetrically differentiated goods, and companies operate using a linear technology, the presence of consumer cooperatives positively affects total industry output, as well as welfare. The effect of cooperatives on welfare proves to be even more significant when goods are either complements or highly differentiated, and when competition is à la Cournot rather than à la Bertrand.     

Do minimum quality standards bite in polluting industries?

We investigate the introduction of a minimum quality standard in a vertically differentiated duopoly where production is polluting. We examine the alternative frameworks with quality-dependent fixed or variable costs, under both price and quantity competition. Under Bertrand behaviour, the introduction of a binding MQS regulation reduces product differentiation, which causes an increase in the output and pollution. Hence its adoption must rely on the increase in consumer surplus generated by the increase in output and average quality. Conversely, in the Cournot setting, a binding MQS decreases output and pollution, and its adoption is driven by the fact that the balance between these effects and the associated increase in average quality yields a welfare improvement.     

The economics of TV tune-in

TV tune-in, namely the preview of forthcoming programs, is an important type of TV advertising. We examine TV tune-in as a continuous variable. First, tune-in can increase profits when TV stations are sufficiently differentiated and the market is partially covered. Second, tune-in crowds out program quality. Third, tune-in lowers advertisement supply. Further, tune-in can increase profits in a partially covered market if firms are sufficiently differentiated. Otherwise, it leads to low profits. We also identify the effects of tune-in on consumer surplus and social welfare and suggest that tune-in should be prohibited whenever it lowers program quality and social welfare.