Strategic quality choice under uncertainty: A real options approach

P.M. Kort, G. Pawlina

Research output: Contribution to journalArticleScientificpeer-review

2 Citations (Scopus)

Abstract

In this paper we study the effects of demand uncertainty and imperfect competition on market entry and product quality choice. We allow for either fixed or flexible quality. Under a fixed quality choice, the follower chooses a higher quality provision. Quality is shown to generally increase with the volatility of demand. The strategic quality choice by the follower may trigger the exit of the leader. Furthermore, flexibility in the leader's quality choice can constitute a strategic disadvantage. Finally, the degree of horizontal differentiation between the supplied goods plays a pivotal role in determining the market structure in the long run.
Original languageEnglish
Pages (from-to)1-19
JournalThe Manchester School of Economic and Social Studies
Volume78
Publication statusPublished - 2010

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