Price versus quantity: Market-clearing mechanisms when consumers are uncertain about quality

High-quality producers in a market where quality varies can reap superior p rofits by charging higher prices, selling greater quantities, or both. Empi rical analyses of the mutual fund and automobile industries show that high- quality producers sell more units than their low-quality competitors, but a t no higher price (or retail markup) per unit. Our theoretical models find that if qualities are known by consumers and production costs are constant, then having a higher quality secures the producer both higher price and hi gher quantity. The market may clear in a different fashion if there is "qua lity uncertainty"; that is, if some consumers can discern quality but other s cannot. Then, high- and low-quality producers may end up setting a common price, which allows the high-quality producer to sell substantially more, in this context, quality begets quantity.