The Curious Case of Competition and Quality

Alongside the consideration of price, competition authorities recognize that quality can be as, if not more, important in some markets. But as competition authorities also recognize, identifying and measuring the dimensions of quality important to many consumers is challenging. To circumvent these challenges, competition authorities rely on several heuristics when assessing a merger’s, cartel’s or monopolistic restraint’s impact on quality. Often the heuristics work well for the competition authorities. In this article, we identify several scenarios where these heuristics break down, when competition and quality are not positively correlated, and when an increase in competition can actually reduce consumer welfare. We also identify two necessary, but not sufficient, conditions that are common to every scenario. With these two conditions in mind, we provide instances when an increase in competition will not increase quality (when one would expect it should) or may even lead to quality degradation.