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The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 617:
The market for melons: Cournot competition with unobservable qualities

Cédric Argenton ()

Abstract: Two firms produce different qualities at possibly different, constant marginal costs. They compete in quantities on a market where buyers only observe the average quality supplied. The model is a generalization of the standard Cournot duopoly, which corresponds to the special case where the two qualities are equal. When the quality differential is large, the firms' output levels are not always strategic substitutes. There can be no, or up to three pure-strategy equilibria. Yet, as long as the cost differential is not extreme, there always exists a stable duopolistic equilibrium. In that sense, strategic quantity-setting helps prevent market unraveling.

Keywords: Cournot competition; quality; duopoly; asymmetric information; Nash equilibrium; (follow links to similar papers)

JEL-Codes: D43; D82; L13; L15; (follow links to similar papers)

49 pages, December 30, 2005, Revised May 8, 2006

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