A Note on the Costs of Quality in Vertically Differentiated Duopoly

The literature on quality choice in vertically differentiated duopoly regularly assumes that either fixed costs or variable unit costs depend on quality. We analyze a generalized model where both types of costs are quality-dependent. Our findings are partially in contrast to the results obtained in the literature so far. In particular, the profit of the low-quality firm increases if variable unit costs increase for any level of quality. Hence, the low-quality firm has an incentive to engage in lobbying for governmental regulations that lead to rising variable costs of quality.