Price and quality competition in the restaurant industry: effects of restaurants’ reputation

Resumo

This paper considers a quality and price competition between two asymmetric restaurants, by establishing a two-stage dynamic game model. We nd that the restaurant with the most reputation offers more food with a higher quality than its rival. We also analyse the effects of the difference of restaurants' reputation on the market equilibrium outcomes. We show that the increase in the reputation difference between restaurants decreases profits of the small restaurant and raises prots of the large restaurant, consumer surplus and social welfare.
Furthermore, compared with the case under quantity competition instead of price, social welfare is higher under price competition, while the opposite holds for small restaurant's profits. However, the relationship of large restaurant's profits is ambiguous.