Mixed-strategy equilibria in a quality differentiation model

Abstract

This paper shows that the standard quality-differentiation duopoly model has, in addition to the two well-known pure-strategy equilibria of maximum quality differentiation, an infinity of mixed-strategy equilibria in which firms choose mixed strategies in the first-stage quality game. In these equilibria, maximum quality differentiation does not occur due to coordination failure. Total expected consumer surplus is the same at all mixed-strategy equilibria and is higher than that under either pure-strategy equilibrium. Total expected industry profit is the same at all mixed-strategy equilibria and is lower than that under either pure-strategy equilibrium.