Monopoly provision of product quality with uninformed buyers

Russeii Cooper, Thomas W. Ross

Research output: Contribution to journalArticle

9 Scopus citations

Abstract

This essay is concerned with a monopolist's incentives to provide high quality goods when some of its customers cannot observe quality prior to purchase. We show that if all buyers have the same tastes for quality, the monopolist will not try to take advantage of the poorly informed. When tastes differ, however, some quality randomization may become profitable as a means to loosen binding self-selection constraints. The profitability of randomization is shown to depend upon the relative degrees of risk aversion of the buyers and on the convexity of the firm's cost of quality function. We view our results as pointing to some potential benefits from imperfect quality control.

Original languageEnglish (US)
Pages (from-to)439-449
Number of pages11
JournalInternational Journal of Industrial Organization
Volume3
Issue number4
DOIs
StatePublished - Dec 1985

All Science Journal Classification (ASJC) codes

  • Industrial relations
  • Aerospace Engineering
  • Economics and Econometrics
  • Economics, Econometrics and Finance (miscellaneous)
  • Strategy and Management
  • Industrial and Manufacturing Engineering

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