Product Bans May Benefit Consumers: Implications from a New Model Of Vertical Product Differentiation

Abstract

We formulate a model of vertical differentiation to evaluate the welfare effects of removing a low quality product from the market. The mechanism through which a welfare improvement might arise is simple: Once the low quality low cost alternative is banned, entry into the high quality segment becomes more likely. This in turn may lead to a significant reduction in the price of the high quality product. We find that such a ban might improve consumer as well as aggregate welfare when consumers value the higher quality more, the marginal cost of producing high quality is lower, the price of low quality is higher, and the price sensitivity for high quality is not too high. The key feature of our model is that it allows elastic demands by individual consumers.