Abstract
This paper shows that in duopolistic price competition, the high-cost firm can earn a higher profit by its ability to produce higher quality. Hence, cost advantage alone cannot guarantee the low-cost firm a higher profit in either the two-stage constituent game or the infinitely-repeated game. There exists at least one profit division which sustains collusion between the duopoly in both price and quality, where the high-cost firm enjoys a higher profit in a certain range of the cost difference. Also, firms enlarge their quality differentiation furthermore in the tacit collusion than in the noncooperative Nash equilibrium of the two-stage constituent game.
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