Quality Competition in Markets with Regulated Prices and Minimum Quality Standards

We study the equilibrium and its stability property in a duopoly market in which minimum quality standards (MQS) are set, prices are regulated with links to product quality, and firms compete in quality. The adjustment dynamics are studied, under the assumption that quality is a sticky variable. We focus on the role that MQS play, in affecting equilibrium allocations and the system dynamic properties. In particular, we show that chaotic dynamics may emerge, precisely due to MQS; under specific circumstances, MQS are responsible for the outcome of maximal differentiation in product qualities across providers.