Quality-Differentiated Demand and Market Efficiency

The paper begins with a discussion of how quality considerations manifest themselves in consumer choice. The concept of latent separability is used to develop a utility structure for quality-differentiated goods, one consistent with the principle of vertical product differentiation and one that allows for a mix of quality levels in a well-ordered market basket, thus overcoming an important limitation in the literature on quality variation. The second part of the paper takes up the question of optimal quality variation under alternative market structures, revealing a more complex critique of monopoly distortions once quality considerations are accounted for