Endogenous vertical segmentation in a Cournot oligopoly

An arbitrary number of (ex ante symmetric) firms first choose whether to produce a high-quality or a low-quality product and then, the quantity of product to put on the market. We establish the following results: (1) there exists competition within and across quality segments; (2) firms may be better off producing the low quality if competition within this segment is sufficiently low; (3) a firm’s switch across qualities may benefit all the other firms; (4) there exists a unique partition of the firms between the two quality segments; (5) if high quality has a larger cost-quality ratio, then the equilibrium exhibits vertical differentiation; (6) there may be too much differentiation from the consumers’ point of view.