Strategic interaction and quality choice

This paper focuses on the quality level choice, emphasising and formally showing the complete role of market structure and strategic interaction between firms on this choice. Historically, the most used model supporting the quality decision is the prevention-appraisal-failure model, which is based solely on the minimisation of the cost of quality. However, as is well known, the quality decision should follow from profit maximisation, thus leading to a higher quality level than the one derived from cost minimisation. We formalise a general model, allowing for any type of market structure and deepening the knowledge on how factors such as demand elasticities and firms' strategic interaction affect the quality choice. Our results contribute to the academic research, by updating the traditional prevention-appraisal-failure approach and, to practitioners, by including in the quality level decision the strategic reaction of other companies, which will affect market shares and profits.