Product quality with heterogeneous consumers and linear pricing

This paper considers a linear-pricing monopolist that conducts vertical product differentiation. Previous analyses consider customers who either have unit demand or firms who conduct nonlinear pricing. In this paper, customers’ opportunity cost of time generates a demand for quality. Customers differ in either their demand, income or taste for quality. Differences in income and taste for quality are sources of vertical differentiation. The presence of quality distortion and the variety that may exhibit it are dependent on the functional form of the customer types’ demand.