Minimum quality standard regulation and entrepreneurial innovation

Abstract

PurposeThe purpose of this paper is to explore the impact that minimum quality standards have on product quality when entrepreneurial innovation is considered.Design/methodology/approachThe author develops a game-theoretic model. It is a standard vertical product differentiation model, but incorporates a minimum quality standard and uncertain entrepreneurial innovation.FindingsWhile the minimum quality standard increases the expected quality of the low-quality product, under reasonable circumstances the expected quality of the high-quality good decreases. Thus, average quality can decrease with regulation intended to increase product quality.Research limitations/implicationsPast research on minimum quality standards does not consider its impact on entrepreneurial effort when their innovation investments lead to uncertain outcomes.Practical implicationsMinimum quality standard regulation can have counterproductive impacts if the impact on entrepreneurs is not considered. The regulation can disincentivize entrepreneurs leading to lower quality products.Social implicationsRegulation can be welfare reducing.Originality/valueThis paper is the first to incorporate entrepreneurial innovation into a product quality model to explore the impact of minimum quality standard regulation.