Equilibrium Quality Choices with Generalized Smooth Cost Function

Abstract

We show that the effect of credible quality commitment on quality choice with Bertrand and Cournot competition in the product market for quadratic cost of quality function (Aoki (2000)) holds for more general cost functions. Specifically, we compare the quality choices with sequential and simultaneous quality choices when cost of quality q is kq n where k is a positive constant and n is any integer greater than 2. The first mover will always choose to produce higher quality, even when cost of quality increases very rapidly (n is large). All previously identifies qualitative comparisons between Bertrand and Cournot competition also extend to the generalized cost function.