Minimum Quality Standards, Fixed Costs, and Competition

By U. Ronnen. 2011

314 citations recorded by the source corpus.

I investigate the consequences of imposing a minimum quality standard on an industry in which firms face quality-dependent fixes costs and compete in quality and price. Even though the high-quality sellers would satisfy the standard in the absence of regulation, imposing a standard leads these sellers to raise qualities. They do so in an effort to alleviate the price competition, which intensifies as a result of the low-quality sellers' having raised their qualities to meet the imposed standard. However, by its very nature, a minimum quality standard limits the range in which producers can differentiate qualities. Hence, in the end, price competition intensifies, and prices -- "corrected for quality change" -- fall. Due to the better qualities and lower hedonic prices, and compared to the unregulated equilibrium, all consumers are better off, more consumers participate in the market, and all participating consumers -- including those who would consume qualities in excess of the standard in the absence of regulation -- select higher qualities. When the consumption of high-quality products generates positive externalities -- as in the case of safety products -- these results favor minimum quality standards. I also show that even in the absence of externalities an appropriately chosen standard improves social welfare.

Subfields: Economics and Econometrics, Marketing

View Paper: https://www.semanticscholar.org/paper/8e87e48940013bc518fe4f518e9a2e670dcd4db6

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Citations in the corpus

National and Sub-national Policies and Institutions (2014, background): “This can make all consumers better off (Ronnen, 1991).”
Competing Environmental Labels (2014, background): “In either case, the presence of a competitor drives the industry to take a more extreme position than it would under autarky, a result reminiscent of the vertical differentiation literature (Ronnen, 1991).”
Strategic and tactical price decisions in hotel revenue management (2016, background): “Specifically, Ronnen (1991) portrays that hedonic prices fall due to a more intense price competition and Cotteleer et al. (2008) add that ignoring local market power may lead to an omitted variable bias on the estimated shadow prices in hedonic pricing models.”
Quality in Supply Chain Encroachment (2016, methodology): “We model consumer heterogeneity by assuming that is uniformly distributed on 60117 (Ronnen 1991, Lehmann-Grube 1997).”
The strategic use of private quality standards in food supply chains (2012, unknown): “…potential revenue losses due to reputation (OECD 2006), to respond to public minimum standards (e.g., Valletti 2000; Crampes and Hollander 1995; Ronnen 1991), to pre-empt or in uence public regulation (e.g., McCluskey and Winfree 2009; Lutz et al. 2000), to substitute for inadequate public…”
Competing on Speed (2018, unknown): “20Our result for s can be seen as an extension of a result of Ronnen (1991), who analyzes minimum quality standards in a simpler static Shaked-Sutton (1982) framework with exogenous preferences for a final product quality.”