SSE/EFI Working Paper Series in Economics and Finance
Producers bargaining over a quality standard
Abstract: We study an asymmetric information model in which two
firms are active on a market where buyers only observe the average quality
supplied. Quantities and cost structures are exogenously given and firms
compete in quality. Before choosing their qualities, they bargain over a
perfectly enforcable minimum quality standard. The bargaining outcome is
given by the Kalai-Smorodinsky (KS) solution. Agreement on a binding
standard is possible only if the firms are sufficiently similar with
respect to their production costs. The agreed-upon standard always falls
short of the joint-profit-maximizing (or, for that matter, the efficient)
level. It is decreasing in the high-cost producer's cost of production.
Yet, it first increases then decreases with the low-cost producer's cost of
production, showing that the latter's bargaining position can be enhanced
by seemingly adverse cost changes.
Keywords: asymmetric information; minimum quality standard; duopoly; bargaining; free riding.; (follow links to similar papers)
JEL-Codes: D43; D82; L13; L15; (follow links to similar papers)
38 pages, December 30, 2005, Revised May 8, 2006
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