Quality-Based Competition, Profitability, and Variable Costs

Abstract

We consider the impact of variable production costs on competitive behavior in a duopoly where manufacturers compete on quality and price in a two-stage game. In the pricing stage, we make no assumptions regarding these costs--other than that they are positive and increasing in quality--and no assumptions about whether or not the market is covered. In the quality stage, we investigate a broad family of variable cost functions and show how the shape of these functions impacts equilibrium product positions, profits, and market coverage. We find that seemingly slight changes to the cost function's curvature can produce dramatically different equilibrium outcomes, including the degree of quality differentiation, which competitor is more profitable (the one offering higher or lower quality), and the nature of the market itself (covered or uncovered). Our model helps to predict and explain the diversity of outcomes we see in practice--something the previous literature has been unable to do.game theory, operations strategy, quality competition

Cooperative quality investment in outsourcing

“…We refer to the seminal work of Reyniers and Tapiero (1995), which highlighted the importance of strategic quality choice in a supplier-producer supply chain. Chambers et al (2006) analyzed the impact of variable production costs on competitive behavior in a duopoly in which manufacturers compete on quality and price in a two-stage game. Xu (2009) investigated a joint pricing and product quality decision in a manufacturerretailer channel, in which the manufacturer sells a product through the retailer.…”

Product variety and vertical differentiation in a batch production system

“…It is assumed thatỹ has uniform distribution with support on [0, 1], i.e., the customer's heterogeneity in the valuation of product quality level is uniformly distributed among all arrivals. The uniform distribution assumption follows a common practice in existing economic literature that models customer income dispersion (e.g., Gabszewicz and Thisse, 1979;Tirole, 1988), which is also adopted by many other research works (e.g., Choudhary et al, 2005;Chambers et al, 2006). In general, the product line design model can be very complicated and difficult to solve (a comprehensive review of optimal product line design methods can be seen in Belloni et al, 2008).…”

Feasting on Leftovers: Strategic Use of Shortages in Price Competition Among Differentiated Products

“…Schmidt and Porteus (2000) examine price competition alone and find Nash equilibria. Other papers explore competition in quality choice followed by price competition (e.g., Moorthy 1988, Jones and Mendelson 1997, Chambers et al 2006. Tyagi (2000) investigates duopoly competition in sequential product positioning under horizontal differentiation.…”