| Abstract: | The standard economic approaches (screening and signalling) to product quality imply an upward sloping relationship between price and product quality. In the case of screening models it is a relationship which applies to the product line of each individual firm. In the case of signalling models it applies across firms. Both types of model have their shortcomings. An alternative approach is presented which involves endogenising the quality control process. Firms voluntarily provide a warranty contract for their products and this, in turn generates an incentive to control quality. The model compares monopolistic and competitive markets in respect of warranties. quality control and the price-quality relationship. Under monopoly, the price-quality relationship is always upward-sloping or flat. Under competition, however, cost shifts or certain demand side shifts can generate a downward-sloping relationship between price and quality. |
