The author thanks an anonymous referee for invaluable suggestions, which were instrumental in improving this manuscript. The usual disclaimer applies.
PRICE FLOORS AND QUALITY CHOICE
Article first published online: 18 JAN 2012
© 2012 The Authors. Bulletin of Economic Research © 2012 Board of Trustees of the Bulletin of Economic Research and John Wiley & Sons Ltd
Bulletin of Economic Research
Volume 66, Issue 3, pages 231–245, July 2014
How to Cite
Bilotkach, V. (2014), PRICE FLOORS AND QUALITY CHOICE. Bulletin of Economic Research, 66: 231–245. doi: 10.1111/j.1467-8586.2011.00422.x
- Issue published online: 4 JUL 2014
- Article first published online: 18 JAN 2012
- price floors;
- vertical differentiation;
This paper studies effects of price floors in a simple model of vertical product differentiation. We find that even non-binding price floor (i.e., minimum price set below the lowest Nash equilibrium price in the baseline model) can increase quality on the market, if the cost of quality is sufficiently low. Where a binding price floor does not increase the equilibrium quality, it makes consumers worse off. There is also a possibility of over-investment into quality as a result of the binding minimum price.