A Note on the High--quality Advantage in Vertical Differentiation Models

It is well established in vertical product differentiation models that the high--quality firm reaps a larger profit in a two--stage quality--price game as long as the cost of quality improvement is zero or is borne as fixed cost in the first stage quality choice. This note shows that the high--quality advantage may fail to hold if there is variable cost of production that is dependent on quality. Copyright Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research 2003