The Low-Quality Advantage in Vertical Product Differentiation

By assuming a triangular distribution of consumers' willingness to pay for quality, this paper makes use of the stylized fact that low-income households are more numerous than high-income households, and thus, income distributions are right-skewed. Accordingly, we present a straightforward two-firm, two-stage vertical product differentiation model with quality-dependent marginal production costs, where the firm offering the low-quality product has the larger market share and profit than the top-quality competitor. This can be termed low-quality advantage and may explain the success of large retailers serving the masses by offering low-quality products. Copyright (c) 2016 John Wiley & Sons, Ltd.