Strategic Choice of Quality When Quality is Costly: The Persistence of the High-Quality Advantage

In a two-firm, two-stage model of vertical product differentiation, I show that for every convex fixed-cost function of quality, the firm that chooses the higher quality at the first stage earns the higher profits. The result holds for the pure-strategy equilibrium in the simultaneous-quality game, and it holds as well if firms choose their qualities in sequential order.