Document Type
Discussion Paper
Publication Date
1-1-1984
CFDP Number
688R
CFDP Revision Date
1984-11-01
CFDP Pages
19
Abstract
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.
Recommended Citation
Cooper, Russell and Ross, Thomas W., "Monopoly Provision of Product Quality with Uninformed Buyers" (1984). Cowles Foundation Discussion Papers. 921.
https://elischolar.library.yale.edu/cowles-discussion-paper-series/921