Technological Progress and the Chamberlin Effect

Technological progress in the economy has an impact on a monopolist's optimal choice of product quality by shifting either the demand or the cost curves. When quality is reduced in response to new technolgy we have a On the assumption that consumers with higher reservation prices for the good also value quality more on the margin, it is shown that quality is reduced in the following three cases: when technolgical progress results in a pure income effect which gives a production on a larger scale by shifting out the demand curve; when the increase in production volume is driven by reductions in marginal cost of producing an extra unit; and finally when there is an increase in total production volume due to a reduction in set-up costs of differentiating the good. There is a possibility that some customers will be harmed by a Chamberlin effect.