Quality Versus Quantity in Vertically Differentiated Products Under Non-Linear Pricing

Abstract

Quality is defined as being skewed when the marginal rate of substitution (MRS) between quantity and quality differs from the marginal rate of transformation (MRT). This definition is used to assess the balance of quality and quantity in each variety of good produced by a monopolist using non-linear pricing, where each variety can be differentiated using both quantity and quality. A variety’s decisive customers face a binding self-selection or participation constraint. Skewing of a variety’s quality occurs when there is a difference between its decisive customer(s) MRS and that of (i) its non-decisive customers (ii) the decisive customers of ‘adjacent varieties’. Some important special cases are identified and analysed.