Minimum quality standards and market dominance in vertically differentiated duopoly

The paper establishes conditions for low quality dominance within a vertically differentiated duopoly and studies the consequences for minimum quality standard policies. Gross surplus from unit consumption consists of a benefit from quality and a baseline benefit. Consumers are heterogeneous (homogeneous) with regard to the former (latter). Marginal cost increases in quality. The quality-then-price equilibrium exhibits low quality dominance first in market share and then in profit as baseline benefit increases relative to the willingness to pay for quality. The preference structure determines the effect of a minimum quality standard in a way related to the pattern of dominance. The standard reduces (increases) welfare under conditions that lead to low (high) quality dominance. (c) 2006 Elsevier B.V. All rights reserved.