EFMD EQUIS CREDITED Industrial organization LEcture 7 Quality, Durability, and 满动 Warranties 學火旦 于 udan university
Binglin Gong Fudan University Industrial Organization Lecture 7 Quality, Durability, and Warranties
Quality In general brands are noncomparable on the basis of quality since each brand can be highly ranked because it has some features that are not available with other brands For this reason since multidimensional modeling of quality is very difficult, we will follow the literature and assume that quality can be measured by a real number Thus, we assume that a higher-quality product is indexed by a higher real number
Quality • In general, brands are noncomparable on the basis of quality since each brand can be highly ranked because it has some features that are not available with other brands. • For this reason, since multidimensional modeling of quality is very difficult, we will follow the literature and assume that quality can be measured by a real number. Thus, we assume that a higher-quality product is indexed by a higher real number
Personal Income and Quality Purchase Two firms producing brands with different qualities quality level k-H and quality level k=L,(h>L Two consumers: consumer 1 with high income 11, and consumer 2 with low income 12 where 1>12>0 Each consumer buys only one unit of the product The utility level of consumer i, 1=1, 2 is given by H(I-pH) if he buys the high-quality brand s L(-pl if he buys the low-quality brand. (121) For given prices, the marginal utility of quality rises with an increase in the consumer's income
Personal Income and Quality Purchase • Two firms producing brands with different qualities: quality level k = H and quality level k = L, (H > L > 0). • Two consumers: consumer 1 with high income I1, and consumer 2 with low income I2, where I1 > I2 > 0. • Each consumer buys only one unit of the product. The utility level of consumer i, i = 1, 2 is given by • For given prices, the marginal utility of quality rises with an increase in the consumer's income
Personal Income and Quality Purchase Proposition 12.1 1. If the low-income consumer buys the high quality brand, then the high-income Consumer 2. definitely buys the high-quality brand 3. If the high-income consumer buys the low- quality brand, then the low-income consumer definitely buys the low-quality brand
Personal Income and Quality Purchase Proposition 12.1 1. If the low-income consumer buys the highquality brand, then the high-income Consumer 2. definitely buys the high-quality brand. 3. If the high-income consumer buys the lowquality brand, then the low-income consumer definitely buys the low-quality brand
Personal Income and Quality Purchase Proof To prove part 1, let U()denote the utility level of consumer i when he buys the brand with lity k We want to show that U1(H)=H(I1-pB)>L(1-p)=U(L), From(12. 1)we have it that since consumer 2 buys the high-quality brand then it must be that U2(H)=H(I2-PH)>L(2-pr)=U2(L). (H-L)I2> HpH-LpL Since.>l. we have it that (H-LI>(H- LI2> HpH Therefore H(1-PH)>L(1-PL). This concludes the proof for the first part. The second part is left as an exercise in section 12.9
Personal Income and Quality Purchase