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Suppose that a monopolists product could be either high quality (H) or low quality (L).
Suppose that a monopolists product could be either high quality (H) or low quality (L).There are 10 identical consumers, each of whom values a low-quality product at vL and a high-quality product at vH=8/5vL.(So if consumers believe that a good is of quality i, then the monopolist can sell 10 units at any price pvi.) The cost of producing q units of a good of quality i is 1/10ciq.If vH/cH=vL/cL=25/16, how much would a high-quality producer have to restrict his supply to convince consumers that his product was actually of quality H?[Hint:Quantity for a high-quality firm must be sufficiently small that a low-quality producer would prefer to sell all 10 units and openly reveal them as low quality,rather than disquising these goods as high-quality items.]
