Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/56127
Authors: 
Argenton, Cédric
Year of Publication: 
2006
Series/Report no.: 
SSE/EFI Working Paper Series in Economics and Finance 618
Abstract: 
We study an asymmetric information model in which two firms are active on a market where buyers only observe the average quality supplied. Quantities and cost structures are exogenously given and firms compete in quality. Before choosing their qualities, they bargain over a perfectly enforcable minimum quality standard. The bargaining outcome is given by the Kalai-Smorodinsky (KS) solution. Agreement on a binding standard is possible only if the firms are sufficiently similar with respect to their production costs. The agreed-upon standard always falls short of the joint-profit-maximizing (or, for that matter, the efficient) level. It is decreasing in the high-cost producer's cost of production. Yet, it first increases then decreases with the low-cost producer's cost of production, showing that the latter's bargaining position can be enhanced by seemingly adverse cost changes.
Subjects: 
asymmetric information
minimum quality standard
duopoly
bargaining
free riding
JEL: 
D43
D82
L13
L15
Document Type: 
Working Paper

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