Quality Competition in a Winner-Take-All Market

Mixed and pure equilibria are characterized for a duopoly model of simultaneous quality improvement followed by Bertrand price competition with homogeneous consumers. In the second stage Bertrand equilibrium, the firm with highest quality outcome captures the entire market. If firms? initial qualities are not too different, then there are a large number of equilibria of the full game. The equilibria have substantially different expected welfare, and predict a wide range of possible quality outcomes.