Monopoly Quality Differentiation with Top-quality Dependent Fixed Costs

This paper extends the standard monopoly quality differentiation model by Mussa and Rosen (1978) to an environment where the production of a (qualitydifferentiated) product-line involves initial fixed investments in common assets such as production facilities or R&D. The fixed cost depends solely on the level of the highest quality, and the invested asset is shared among all the qualities in the product-line. The presence of top-quality dependent fixed costs always leads to a pooling of some high-type customers. By contrast with the standard model, all consumer types (including the highest type) experience quality distortion, and the firm may reduce the quality range relative to the efficient one. Key Words : Monopoly Quality Differentiation, Fixed Costs, Cost Spill-over,Product Diversity.