Unexploited comparative advantages in a differentiated duopoly

Abstract

The present paper analyses the question whether firms choose product varieties for which they enjoy a comparative advantage with respect to their rivals. In a limited set-up, that of a vertically differentiated duopoly, it is here found that firms may not choose in such an optimal way, but rather end up in “perverse” equilibria where the firm most efficient in producing a high quality variant of a product produces instead the low quality one, and leaves to the less efficient rival the high quality position.