Monopoly Provision of Product Quality with Uninformed Buyers
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This essay is concerned with a monopolist’s incentives to provide a high quality goods when some of its customers cannot observe quality prior to purchase. We show that if all buyers have the same tastes for quality, the monopolist will not try to take advantage of the poorly informed. When tastes diﬀer, however, some quality randomization may become proﬁtable as a means to loosen binding self-selection constraints. The proﬁtability of randomization is shown to depend upon the relative degrees of risk aversion of the buyers and on the convexity of the ﬁrm’s cost of quality function. We view our results as pointing to some potential beneﬁts from imperfect quality control.
Cooper, Russell and Ross, Thomas W., "Monopoly Provision of Product Quality with Uninformed Buyers" (1984). Cowles Foundation Discussion Papers. 921.