The Low‐Quality Advantage in Vertical Product Differentiation

By assuming a triangular distribution of consumers' willingness to pay for quality, this paper makes use of the stylized fact that low‐income households are more numerous than high‐income households, and thus, income distributions are right‐skewed. Accordingly, we present a straightforward two‐firm, two‐stage vertical product differentiation model with quality‐dependent marginal production costs, where the firm offering the low‐quality product has the larger market share and profit than the top‐quality competitor. This can be termed low‐quality advantage and may explain the success of large retailers serving the masses by offering low‐quality products. Copyright © 2016 John Wiley & Sons, Ltd.