DP1635 | Attribute Dependence and the Provision of Quality

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A quality improvement often necessitates modifications of varietal product features. This paper studies firms? incentives to provide quality when this decision affects the goods? degree of horizontal differentiation. Intuitively, one is inclined to argue that private incentives to provide quality are insufficient relative to the social optimum if a quality improvement reduces horizontal differentiation. We find that this argument depends on whether the game is simultaneous or sequential. In the former case private incentives prove excessive relative to the social optimum, and in the latter case, insufficient. As a result, a regulator might want to impose either minimum or maximum quality standards.