TY  - JOUR
AU  - Berry,Steven
AU  - Waldfogel,Joel
TI  - Product Quality and Market Size
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 9675
PY  - 2003
Y2  - May 2003
UR  - http://www.nber.org/papers/w9675
L1  - http://www.nber.org/papers/w9675.pdf
N1  - Author contact info:
Steven T. Berry
Yale University Department of Economics
Box 208264
37 Hillhouse Avenue
New Haven, CT 06520-8264
Tel: 203/432-3556
Fax: 203/432-6323
E-Mail: steven.berry@yale.edu

Joel Waldfogel
Frederick R. Kappel Chair in Applied Economics
3-177 Carlson School of Management
University of Minnesota
321 19th Avenue South
Minneapolis, MN 55455
Tel: 612/626-7128
E-Mail: jwaldfog@umn.edu
AB  - Recent literature notes that when quality is produced with fixed costs, a high quality firm can undercut its rival's prices and may find it profitable to invest more in quality as market size grows large. As a result, a market can remain concentrated even as it grows large. When quality is produced with variable costs, by contrast, a wide range of product qualities can coexist in the market because they are offered at different prices. Larger markets will fragment and offer products with a wider range of qualities. Using US urban areas as markets, we examine the relationships between market size and product quality - and between market size and product concentration - for two industries that differ in their quality production process. We document that in the restaurants industry, where quality is produced largely with variable costs, the range of qualities on offer increases in market size, with each product maintaining a small market share. In daily newspapers, where quality is produced with fixed costs, the average quality of products increases with market size, and the market does not fragment as it grows large.
ER  -