Product quality, reputation, and market structure

Abstract

In a repeated game in which firms simultaneously choose price and product quality, but quality is observed only after consumption takes place, equilibria exhibiting high quality may exist in oligopoly markets even when the low-quality one is a unique equilibrium outcome in monopoly and competitive markets. Oligopolists can sustain high quality through the threat of both a loss of reputation and a breakdown in tacit collusion. While we abstract from other reasons that market structure might affect product quality, we show that the inverted-U shaped relationship between feasible quality and market structure is robust to several generalizations of the model. © (2011) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.