SSE/EFI Working Paper Series in Economics and Finance
The market for melons: Cournot competition with unobservable qualities
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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