A Note on Market Coverage in Vertical Differentiation Models With Fixed Costs

ABSTRACT With fixed costs of quality improvement, we find that a covered market outcome with an interior solution in the price stage is not a Nash equilibrium. When the degree of consumer heterogeneity is high (low) enough, an uncovered market outcome (a covered market outcome with a corner solution in the price stage) is the only Nash equilibrium. When the degree of consumer heterogeneity is moderate, both of the two market outcomes are Nash equilibria, but an uncovered market outcome yields higher social welfare than a covered market outcome with a corner solution in the price stage.