Quality and price competition in a duopoly under product liability and traceability

¹ School of Marketing and Logistics Management, Nanjing University of Finance & Economics, Nanjing 210023, P.R. China
² School of Economic and Management, Southwest University of Science and Technology, Mianyang 621010, P.R. China
³ Business School, Zhejiang Wanli University, Ningbo 315100, P.R. China
⁴ School of Management, Hefei University of Technology, Hefei 230009, P.R. China

^* Corresponding author: wannana850417@163.com

Received: 8 August 2022
Accepted: 22 June 2023

Abstract

This study aims to explore how traceability affects quality and price competition in a duopoly. A theoretical model is developed in which both enterprises are liable to recall low-quality (defective) products identified by traceability and compensate consumers for the disutility caused by unidentified low-quality products. The equilibrium results are derived by determining the optimal product quality and sales price decisions. The key findings are highlighted below. (1) Traceability affects product quality primarily through the expected social cost (the sum of expected recall cost and expected consumer disutility), i.e., higher (lower) expected social cost induced by increased traceability of each enterprise leads to higher (lower) product quality for both enterprises, enhancing (reducing) quality competition. (2) If an enterprise’s improved (decreased) product quality is driven by its own increased traceability, it will result in lower (higher) consumer demand and profit, while it will result in higher (lower) consumer demand and profit if caused by its competitor’s increased traceability. (3) If an enterprise’s increased traceability results in higher expected social cost, the enterprise’s sales price falls while the competitor’s sales price rises; otherwise, both enterprises’ sales prices fall, leading to greater price competition. (4) Quality competition is unaffected by product liability but is improved by increased recall cost and consumer disutility, whereas price competition is intensified by increased consumer disutility but is reduced by increased product liability and recall cost. Managerial insights are also discussed.