"Risky quality choice"JEL codes: L12; L13
Abstract: In vertical product differentiation with a stochastic research technology, firms should target their research different quality levels for efficiency. In a natural monopoly where the top firm finds it most profitable to sell to the whole market, the incentives for risk-takin and for firms to differentiate their tageted qualities are optimal. In a natural oligopoly (which results when there is sufficient dispersion of tastes), the relationship between a firmīs payoff and its quality improvement over other firmīs is weakened. This diminishes the firmsī incentives to differentiate and the targeted qualities are too low and too close toghether.