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Strategic interaction and quality choice

2011; Taylor & Francis; Volume: 22; Issue: 3 Linguagem: Inglês

10.1080/14783363.2010.530809

1478-3371

Ana S. Branca, Margarida Catalão‐Lopes,

Business Strategy and Innovation

Abstract This paper focuses on the quality level choice, emphasising and formally showing the complete role of market structure and strategic interaction between firms on this choice. Historically, the most used model supporting the quality decision is the prevention-appraisal-failure model, which is based solely on the minimisation of the cost of quality. However, as is well known, the quality decision should follow from profit maximisation, thus leading to a higher quality level than the one derived from cost minimisation. We formalise a general model, allowing for any type of market structure and deepening the knowledge on how factors such as demand elasticities and firms' strategic interaction affect the quality choice. Our results contribute to the academic research, by updating the traditional prevention-appraisal-failure approach and, to practitioners, by including in the quality level decision the strategic reaction of other companies, which will affect market shares and profits. Keywords: cost of qualitymarket structurestrategic interactionquality Notes For instance, Goering and Read (Citation1995), using a two-period oligopoly model, show that the independence result may be re-established if firms are required to provide warranties. One could think that when , as there is no response by the rivals, there is no competition. However, there is: each firm only retains a share of the whole market. Collusion is the only case in which there is no competition, as firms agree to split the market. Note that price is a negative function of total quantity but a positive function of quality. This ‘elasticity’ measures, in a sense, the upward shift in demand following a quality improvement, so we denote it as the demand–quality elasticity. The mathematical formula presents the reaction of P to average quality, where the reaction of P should be understood as the reaction (shift) of the whole demand curve. Actually, this is a ‘quality–margin’ relationship. This is clear by simply computing the derivatives in order of the two variables.