The Effects of Minimum Quality Standards on Product Quality

In a model where two firms’ products are di¤erentiated both, horizontally and vertically, introduction of a quality standard affects equilibrium quality levels of both firms. The effects, furthermore, depend upon consumers being or not perfectly informed about qualities. Qualities are strategic substitutes and under perfect information only non-innocuous standards, i.e. above the lowest quality in an unregulated equilibrium, change the equilibrium. However, the average quality in the market may go down due to the standard, and total consumers welfare decrease. Under uncertainty, even apparently innocuous standards, below the lowest unregulated equilibrium quality, may alter the equilibrium quality choices