Does a minimum quality standard always reduce the price of high quality products?

John C. Panzar*, Ian Savage

*Corresponding author for this work

Research output: Contribution to journalArticle

3 Scopus citations

Abstract

This paper investigates the standard finding that instituting a minimum quality standard within a vertically differentiated market unambiguously benefits consumers of high quality products. A competitive model is specified in which random cost shocks lead some firms to cheat in equilibrium on their reputation for high quality. When cheating occurs, instituting or raising the level of a minimum standard can lead to the price of high quality products either increasing or decreasing. The effect of a minimum quality standard on the price of high quality products becomes an empirical rather than a theoretical issue.

Original languageEnglish (US)
Article number39
JournalB.E. Journal of Economic Analysis and Policy
Volume11
Issue number1
DOIs
StatePublished - Jan 1 2011

Keywords

  • cheating
  • minimum quality standard
  • product quality
  • reputation

ASJC Scopus subject areas

  • Economics and Econometrics
  • Economics, Econometrics and Finance (miscellaneous)

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