Price Discrimination and Quality Improvement
Ohio State University Working Paper #96-18
33 Pages Posted: 11 Mar 2000
Date Written: July 1999
Abstract
'Top-of-the-line PCs and servers ... tend to be purchased by early adopters, technophiles who just can't wait' (Fortune, February 17, 1997). This paper constructs a model of quality improvements where multiple quality levels can sell due to differences in consumers' valuations of quality. Firms can price discriminate against consumers so that afficionados pay a price premium, while frugal consumers receive a quality level below the highest available. When the spending share of quality enthusiasts is sufficiently large, government intervention to ensure that only the highest quality level available of each product is sold must be welfare reducing due to reduced innovation.
JEL Classification: O31, L16, D31
Suggested Citation: Suggested Citation
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