, Volume 36, Issue 2, pp 283-302
Date: 24 Jul 2007

Minimum quality standards and consumers’ information

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Abstract

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.