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Relative and Absolute Preference for Quality

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posted on 2022-10-31, 18:08 authored by Constantine AngyridisConstantine Angyridis, Debapriya Sen

This paper seeks to explain two related phenomena: (i) it is often the case that when the newvariety of a product is launched, some consumers do not purchase the latest variety and (ii)the quality of the latest variety of a product is often not significantly superior compared to the existing variety.  We consider a simple model of monopoly with two types of consumers:“regular” (typeR) who cares only about the absolute quality of the product and “fastidious”(typeF) who cares about therelativequality vis-a-vis the existing variety.  We show thatit  is  never  optimal  for  the  monopolist  to  exclusively  serve  typeF. Moreover,  we  identifysituations  where  although  it  is  optimal  for  the  monopolist  to  upgrade  the  quality  of  theproduct,  this upgrade is not sufficient to meet the standards of typeF.As a result,  only typeR buys the upgraded variety while typeF chooses not to buy it.

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