STRATEGIC CHOICE OF QUALITY WHEN QUALITY IS COSTLY - THE PERSISTENCE OF THE HIGH-QUALITY ADVANTAGE

In a two-firm, two-stage model of vertical product differentiation, I show that for every convex fixed-cost function of quality, the firm th at chooses the higher quality at the first stage earns the higher prof its. The result holds for the pure-strategy equilibrium in the simulta neous-quality game, and it holds as well if firms choose their qualiti es in sequential order.