Effect of credible quality investment with Bertrand and Cournot competition

Reiko Aoki

Research output: Contribution to journalArticle

16 Citations (Scopus)

Abstract

We show how credible revelation and ability to commit to quality choice effect equilibrium qualities and welfare when product market is either Bertrand or Cournot competition. We show that results depend on the type of competition but not generally on the cost of quality function. We show that with Bertrand competition, the equilibrium qualities are lower with credible commitment. Competition is moderated and producer surplus is higher and consumer surplus lower. With Cournot competition, higher quality will be better but lower quality will be worse with credible commitment. Consumer surplus is always greater with credible commitment and if cost does not increase too quickly with quality, producer surplus will also increase. Thus credible commitment is a collusive device with Bertrand competition but it can improve social welfare with Cournot competition.

Original languageEnglish
Pages (from-to)653-672
Number of pages20
JournalEconomic Theory
Volume21
Issue number2-3
DOIs
Publication statusPublished - Mar 1 2003

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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