Quality competition on markets: a socio-economic account

Abstract When, and for whom, does it pay to make high-quality products? This article models how quality competition incentivizes producers to make products of particular qualities. Quality is defined as an abstract property of products that explains relative markups on prices that buyers will pay for otherwise comparable goods. Relative differences in quality sustain interlinked quality niches whose appeal to producers vary. The ordering of niches by quality and its implications for profitability establish the market’s quality order of production. The model yields testable predictions for the locus of quality-related innovations. An analysis of the bottle closures used on 52 880 German wines by 1028 winemakers in three winemaking regimes supports the general claim that, and a specific claim as to how, quality competition incentivizes producers to pursue different quality-related strategies. The presented model situates quality competition and the socially embedded quality order of production at the heart of a socio-economic account of markets.