Market Coverage and the Existence of Equilibrium in a Vertically Differentiated Duopoly”, Working Paper

The existence of a pure-strategy subgame perfect equilibrium in qualities and prices is investigated in a duopoly model of vertical dif-ferentiation where quality improvements require a quadratic variable cost. The alternative cases of partial and full market coverage are considered. It is shown that there exists a parameter range where the incentive to decrease di¤erentiation arises for the high-quality …rm, preventing …rms to reach a pure-strategy duopoly equilibrium. JEL Classi…cation: L1