Who’s Number One? Asymmetric Production Costs as a Determinant of Quality Rankings

摘要

A consistent result in vertical differentiation models is the existence of a profit premium for the highest quality firm. This premium creates a competition to be the top-ranked firm. By introducing asymmetries in marginal costs in a three-stage game, we obtain an endogenously determined quality ranking. We find that with cost differences, quality differentials decrease, and that when cost differences grow large enough, we have a unique duopoly equilibrium where the low-cost firm offers high quality. We then conduct a welfare analysis and discuss implications for R&D, trade as well as, for setting quality standards and competition policies.