On the Robustness of the High-Quality Advantage under Vertical Differentiation

The idea that the high-quality provider in a vertically differentiated duopoly earns the higher profit (the so-called Bhigh-quality advantage") appears to be an established fact among economists. This note shows that the high-quality advantage is not a robust feature of vertical differentiation models. A low-quality advantage can be predicted under perfectly plausible assumptions, such as a concave utility-quality and/or a convex unit cost-quality relation. The existence of a high-or a low-quality advantage depends on the nature of the firms' strategic interaction.