Endogenous Timing in Quality Investments and Price Competition

Abstract

We modify the price-setting version of the vertically dierentiated duopoly model by Aoki (2003) by introducing an extended game in which …rms noncooperatively choose the timing of moves at the qual- ity stage. Our results show that there are multiple equilibria in pure strategies, in which …rms always select sequential play at the qual- ity stage. We also investigate the mixed-strategy equilibrium, reveal- ing that the probability of generating outcomes out of equilibrium is higher than its complement to one. In the alternative of full market coverage, we show that the quality stage is solved in dominant strate- gies and therefore the choice of roles becomes irrelevant as the Nash and Stackelberg solutions coincide. JEL codes: C73, L13