Cédric Argenton: Dept. of Economics, Stockholm School of Economics, Postal: P.O. Box 6501, SE-113 83 Stockholm, Sweden
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.
49 pages, First version: December 30, 2005. Revised: May 8, 2006. Earlier revisions: January 18, 2006, February 1, 2006, February 1, 2006, May 8, 2006, May 8, 2006.
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