This thesis analyzes duopoly models in vertical product differentiation and makes considerable contributions to the existing literature by addressing two main gaps in the current theoretical discussion. First, we extend the model from Tirole (1988) to allow for differing quality cost parameters between firms. By departing from the conventional analysis of quality competition with symmetric firms, our work provides a potential explanation to why certain firms choose to produce higher quality goods than others in a vertically differentiated industry. Second, we address the natural concern that quality cannot be chosen with 100% certainty by incorporating stochastic qualities into the Tirole (1988) model. We do so by limiting firms so that they could each only pick a target quality, which serves as an upper-bound of a random variable whose realization is the actual product quality. We show that, when quality is costless, both firms will choose the highest possible target quality in a unique dominant strategy equilibrium. This conclusion is a significant departure from the findings of Shaked and Sutton (1982) and Tirole (1988), which show that firms will always intentionally differentiate product qualities to relax price competition. Our results imply that uncertain quality choice is a sufficient condition for increasing quality competition between firms. Lastly, we show that, when quality realization is uncertain and firms face quality-improving fixed costs, the investment costs and technological frontier of an industry uniquely determines its firms' quality choice equilibrium. In industries with cheap quality investment costs and low technological frontiers, firms will maximize their quality investment to obtain the highest possible quality distribution. On the other hand, industries with expensive investment costs and advanced technological frontiers will yield equilibria that involve less intense quality competition between firms.
"},{"label":"Degree","value":["Bachelor of Arts with Departmental Honors"]},{"label":"Author-supplied Keywords","value":["Product differentiation","Quality competition","Game theory"]},{"label":"Administrative Note","value":"Drupal Node ID: 23892