Essays on production and pricing decisions

There has been considerable interest in finding and explaining the basic elements that can drive product quality up. In the literature this is largely done by modelling the effects of investing in learning and process improvement, and of cost reduction. In the first essay, demand is modelled as a function of price and quality. With this demand function, the firm should produce output of higher quality, the increase in quality being dependent on consumers’ sensitivity to quality and to price, and the effect of technological improvement on product price and quality are very different from those when the demand is a function of price alone. Some twenty states in the U.S. have passed recycling laws which mandate consumption of old newspaper by the newsprint industry. To study the effect of regulation, a model is used in which two firms compete under the regulatory constraint—one firm producing the recycled product, the other the virgin product. Assuming the regulatory constraint is binding, and the demand for the recycled product is derived solely from the legislation, interesting results such as the two firms share equal profits, and consumers pay higher average price in competitive equilibrium than the cartel price, are obtained in the second essay. The two firm model is generalized to include n firms which compete under the same kind of regulatory constraint in the third essay. Results similar to the two firm case are obtained. When the recycled product and the virgin product are partially substitutable, regulation that mandates consumption of the recycled product results in infinitely many equilibria. A dominating equilibrium exists if the demand parameters satisfy a certain condition, otherwise it is not clear how to select an equilibrium. On the other hand, a suitable tax on the virgin product, or its producer, serves to induce compliance with the recycling policy and equilibrium selection. The equilibrium prices and profits of the two firms under the schemes of production tax, excessive consumption tax and progressive profit tax are examined and compared in the fourth essay. It is interesting to find that the tax rate for excessive consumption is comparatively low and, in equilibrium, this tax scheme collects no tax payment.Business, Sauder School ofGraduat