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Keywords:

  • price floors;
  • vertical differentiation;
  • quality;
  • D43;
  • L13;
  • L51

ABSTRACT

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.