PRICE FLOORS AND QUALITY CHOICE

Authors

  • Volodymyr Bilotkach

    Corresponding author
    1. Newcastle Business School, Northumbria University
    • Correspondence: Volodymyr Bilotkach, Senior Lecturer, Newcastle Business School, Northumbria University, City Campus East 1, Newcastle Upon Tyne NE1 8ST, UK. Tel: +44-0191-227-3465; Fax: +44 (0)191 227 3903; Email: volodymyr.bilotkach@northumbria.ac.uk.

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  • The author thanks an anonymous referee for invaluable suggestions, which were instrumental in improving this manuscript. The usual disclaimer applies.

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.

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