Market configurations when marginal costs are quality‐dependent

Abstract

Most quality-then-price decision models under vertical product differentiation con-sider a predetermined market configuration. We endogenize market configuration considering quality-dependent marginal costs and conclude that a strictly interior full coverage duopoly holds for some parameter values, unveiling the relevance of this commonly assumed market structure. Moreover, we show that a monopoly never arises in equilibrium, and (i) there are multiple equilibria at the frontier between inte-rior and corner full coverage duopoly, (ii) the market is fully (partially) covered when relative tastes' heterogeneity is low (high), and (iii) there is a discontinuity in the tran-sition from partial coverage to full coverage duopoly.