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The Multiproduct Firm, Quality Choice, and Regulation

David Besanko, Shabtai Donnenfeld and Lawrence J. White
The Journal of Industrial Economics
Vol. 36, No. 4 (Jun., 1988), pp. 411-429
Published by: Wiley
DOI: 10.2307/2098447
Stable URL: http://www.jstor.org/stable/2098447
Page Count: 19
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The Multiproduct Firm, Quality Choice, and Regulation
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Abstract

A monopolist facing a market of heterogeneous consumers will distort the quality array. This paper explores three regulatory remedies--minimum quality standards (MQS), maximum price regulation (MPR), and rate of return regulation (RORR)--that counteract this distortion. MQS and MPR raise the quality offered to consumers with a low willingness-to-pay for quality. While MQS have no effect on the quality offered to consumers with a high willingness-to-pay, MPR decreases the quality offered to this group. If production of high- (low-)quality goods is capital-intensive, RORR increases (decreases) the quality offered to both groups.

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