Regulation and Product Quality in a Multiproduct Firm

A monopolist facing a market of heterogeneous consumers will distort the quality array. This paper explores three regulatory remedies--minimum quality standards (MQS), maximum price regulation (MPR), and rate of return regulation (RORR)--that counteract this distortion. MQS and MPR raise the quality offered to consumers with a low willingness-to-pay for quality. While MQS have no effect on the quality offered to consumers with a high willingness-to-pay, MPR decreases the quality offered to this group. If production of high- (low-)quality goods is capital-intensive, RORR increases (decreases) the quality offered to both groups.