Income Distribution, Vertical Differentiation, and the Quantity Competition

The paper analyzes the effects of the change of the income distribution on the equilibrium outcomes in the duopoly-quality model with quantity competition. The analysis results show that with zero quality-cost and an income inequality not too high, then both firms always choose the highest quality level. If the quality-cost is convex, then the average quality level will decrease and the vertical differentiation level will increase in the income inequality. These results are different from the Yurko (2011), who made a similar analysis under the quality-price competition model. Another contribution of the paper is that it gives the sufficient conditions for the single firm to choose multiple levels of the quality, i.e. the quality-cost function is convex, vertical differentiation is large enough, and the marginal cost is not too high