Advances in Vertical Differentiation: theory and applications

This project will study firms' decisions regarding the quality of their products when unit costs increase with quality. We will develop theoretical models and validate them using experimental economics. We will take the housing market (HM) as our leading application, where building a higher quality house may require the use of more energy efficient resources and more innovative materials. Our contributions will be mainly on the consideration of quality-dependent unit costs and that the partial or full coverage of the market is determined endogenously, issue that has been almost ignored in the literature but that may have important impacts in terms of welfare analysis. The HM model presents additional challenges as the house location brings another differentiation dimension. We will study how the house's location influences the quality choices of the urban land developers, in order to provide policy guidance to promote the construction of more energy- efficient and innovative buildings.