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Monopoly and Quality Distortion: Effects and Remedies

David Besanko, Shabtai Donnenfeld and Lawrence J. White
The Quarterly Journal of Economics
Vol. 102, No. 4 (Nov., 1987), pp. 743-768
Published by: Oxford University Press
Stable URL: http://www.jstor.org/stable/1884279
Page Count: 26
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Monopoly and Quality Distortion: Effects and Remedies
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Abstract

A monopolist that sells in a market in which consumers differ in their willingness to pay for quality will distort and enlarge the range of products offered for sale. We examine the positive and normative impacts of remedies used to counteract such distortions. For the case of a price ceiling, the monopolist improves quality at the low quality end of the market, offsetting the distortion induced by the unregulated exercise of monopoly power. Social welfare can be shown to increase for a sufficiently slight degree of price regulation. For minimum quality standards, the social welfare implications are ambiguous because the standards may exclude some consumers from the market.

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