A New Model of Quality

38 Pages Posted: 8 Jul 2000 Last revised: 1 Jul 2010

See all articles by Kala Krishna

Kala Krishna

Pennsylvania State University - Department of Economics; National Bureau of Economic Research (NBER)

Tor Winston

U.S. Department of Justice - Antitrust Division

Date Written: May 1998

Abstract

We develop a new model of quality to capture the idea that even if a customer chooses to purchase a product, it may fail to deliver.' In this event, the customer may wish to choose some other product. We model this as a two stage game where firms first choose quality and then price. We find that in equilibrium, the high quality firm (the one with a higher probability of being able to deliver') will always make higher profits than the low quality one even if costs of quality are sharply increasing. Our work thus provides a reason for high quality niches to be inherently more profitable. The implications for welfare and equilibrium under free entry are also studied.

Suggested Citation

Krishna, Kala and Winston, Tor, A New Model of Quality (May 1998). NBER Working Paper No. w6580, Available at SSRN: https://ssrn.com/abstract=226308

Kala Krishna (Contact Author)

Pennsylvania State University - Department of Economics ( email )

523 Kern Graduate Building
University Park, PA 16802-3306
United States
814-865-1106 (Phone)
814-863-4775 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Tor Winston

U.S. Department of Justice - Antitrust Division ( email )

950 Pennsylvania Avenue, NW
Washington, DC 20530
United States
202-307-0866 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
35
Abstract Views
968
PlumX Metrics