Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/308368 
Year of Publication: 
2024
Series/Report no.: 
CESifo Working Paper No. 11472
Publisher: 
CESifo GmbH, Munich
Abstract: 
In this paper, we explore how heterogeneous firms decide on vertical and horizontal qualities of their products. We show that if increasing the product qualities appears to be relatively costly, more productive firms choose higher vertical quality but lower horizontal quality. We also document distortions that arise in our framework. Specifically, we find that in the market equilibrium, firms tend to underinvest in horizontal quality but overinvest in vertical quality compared to the first best allocation. Using data from pizzerias in Oslo, Norway, we provide a calibration exercise to estimate welfare losses due to the quality distortions.
Subjects: 
monopolistic competition
vertical quality
horizontal quality
welfare
JEL: 
D43
L13
Document Type: 
Working Paper
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