Yardstick Competition and Quality

Reprint No. 2009:19

Author(s): Thomas TangeråsYear: 2009 Title: Journal of Economics & Management Strategy Volume (No.): 18 (2) Pages: 589–613
Online article (restrictions may apply)

This paper explores the consequences for quality of introducing yardstick competition in duopoly when a verifiable quality indicator is available. Yardstick competition can be implemented by amenu of transfers that are linear in the cost differential between the two firms and in quality. Cost- and quality incentives are stronger in larger firms when improvements are highly valued by consumers and firms can significantly influence quality. Expenditures on quality improvement can increase or decrease following the introduction of yardstick competition. The crucial factor is the likelihood ratio of productivity between the two firms, not productivity differences.

Tangerås, Thomas (2009), "Yardstick Competition and Quality". Journal of Economics & Management Strategy 18(2), 589–613.

Thomas Tangerås


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