Strategic quality choice under uncertainty: a real options approach

Pawlina, G and Kort, Peter M (2010) Strategic quality choice under uncertainty: a real options approach. Manchester School, 78 (1). pp. 1-19. ISSN 1463-6786

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In this paper we study the effects of demand uncertainty and imperfect competition on market entry and product quality choice. We allow for either fixed or flexible quality. Under a fixed quality choice, the follower chooses a higher quality provision. Quality is shown to generally increase with the volatility of demand. The strategic quality choice by the follower may trigger the exit of the leader. Furthermore, flexibility in the leader's quality choice can constitute a strategic disadvantage. Finally, the degree of horizontal differentiation between the supplied goods plays a pivotal role in determining the market structure in the long run.

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Journal Article
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Manchester School
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11 Jul 2011 18:28
Last Modified:
14 Mar 2023 00:51