Bidimensional vertical differentiation

Paolo Garella and Luca Lambertini ()

Departmental Working Papers from Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano

Abstract: In markets where product quality is important, more than one characteristic is usually necessary to define product quality. Standard models maintain that: (i) in a duopoly there will be a quality leader no matter wether the product can incorporate one or two vertical attributes; (ii) differentiation pertains only to one attribute. By contrast, in our set-up there are also equilibria where the quality leader is better in two attributes, and others where there is cross leadership, namely a situation where each firm designs a product to dominate the other in one characteristic. The role of cost complementarities is also examined. Applications to Minimum Quality Standards, home bias effects (or "perception bias effects"), and a tax on quality products are sketched, showing that assessments based on standard models may be incomplete.

Keywords: Oligopoly equilibrium; vertical differentiation; quality; scope economies; cost complementarities; Minimum Quality Standards; Home Bias Effect; Tax on Quality (search for similar items in EconPapers)
JEL-codes: L10 L13 L15 (search for similar items in EconPapers)
Date: 2010-02-15
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Journal Article: Bidimensional vertical differentiation (2014)
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