Relative and Absolute Preference for Quality

Angyridis, Constantine and Sen, Debapriya (2010): Relative and Absolute Preference for Quality.

Abstract

This paper seeks to explain two related phenomena: (i) it is often the case that when the new variety of a product is launched, some consumers do not purchase the latest variety and (ii) the quality of the latest variety of a product is often not significantly superior compared to the existing variety. We consider a simple model of monopoly with two types of consumers: "regular" (type R) who cares only about the absolute quality of the product and "fastidious" (type F) who cares about the relative quality vis-a-vis the existing variety. We show that it is never optimal for the monopolist to exclusively serve type F. Moreover, we identify situations where although it is optimal for the monopolist to upgrade the quality of the product, this upgrade is not sufficient to meet the standards of type F. As a result, only type R buys the upgraded variety while type F chooses not to buy it.

• Item Type: MPRA Paper
• Language: English
• Keywords: Relative Preference; Absolute Preference; Singular Menu; Separating Menu
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D86 - Economics of Contract: Theory; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D42 - Monopoly; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L15 - Information and Product Quality ; Standardization and Compatibility

References

Acharyya, R. 1998. Monopoly and Product Quality Separating or Pooling Menu? Economics Letters, Vol. 61, 187-194

Besanko, D., Donnenfeld, S. and White, L.J. 1987. Monopoly and Quality Distortion: Effects and Remedies. Quarterly Journal of Economics, Vol. 102, 743-768

Kim, J.-H. and Kim, J.-C. 1996. Quality Choice of a Multiproduct Monopolist and Spill-over Effect. Economics Letters, Vol. 52, 345-352

Maskin, E. and Riley, J. 1984. Monopoly with Incomplete Information. Rand Journal of Economics, Vol. 15, 171-196

Mussa, M. and Rosen, S. 1978. Monopoly and Product Quality. Journal of Economic Theory, Vol. 18, 301-317.

Hartley, R.F. 2006. Marketing Mistakes and Successes, John Wiley & Sons Inc.

Salanie, B. 2005. The Economics of Contracts: A Primer. The MIT Press, Cambridge, Massachusetts.

Spence, A.M. 1975. Monopoly, Quality and Regulation. Bell Journal of Economics, Vol. 6, 417-429.

White, L.J. 1977. Market Structure and Product Varieties. American Economic Review, Vol. 67, 179-182.