TY  - JOUR
AU  - Krishna,Kala
AU  - Winston,Tor
TI  - A New Model of Quality
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6580
PY  - 1998
Y2  - May 1998
UR  - http://www.nber.org/papers/w6580
L1  - http://www.nber.org/papers/w6580.pdf
N1  - Author contact info:
Kala Krishna
Department of Economics
523 Kern Graduate Building
The Pennsylvania State University
University Park, PA 16802
Tel: 814/865-1106
Fax: 814/863-4775
E-Mail: kmk4@psu.edu

Tor Winston
Antitrust Division
US Department of Justice
Washington, DC
E-Mail: Tor.Winston@usdoj.gov
AB  - 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.
ER  -