Sequential vs. Simultaneous Quality Choices with Bertrand and Cournot Competition

We consider a multi-stage game where firms first choose product quality and then compete for sales in the product market. We show how the equilibrium qualities depend on the timing of quality choices and on the form of competition at the sale stages. If the product market is characterized by Bertrand competition (price setting), then lower qualities will be chosen under sequential quality choice than under simultaneous quality choice. Although qualities may be strategic complements or substitutes, depending on the type of product market competition, the first mover will always choose the higher quality and have greater profit, independent of the nature of product market competition. We also show that the effect of timing of quality choice on producer, consumer, and social surpluses depends on the type of product market competition.