Measurement of quality in monopolistic product market

The Hedonic approach provides a powerful analytical tool to extract the quality factor from price, but has difficulty in its application in the case of a monopolistic product market. R&Dactivities directed toward raising product quality in high-tech product markets, is one of a company's most important strategic factors. Tremendous excess profits can be the result of presenting the market with high-quality products versus average products. In this paper, we present a model designed to estimate the quality index of a product under a monopolistic situation. To investigate how the model works we apply it to the classical orchestra concert market in Japan, where foreign orchestras with higher quality than the Japanese ones, seem to have market power and pricing. The estimation results show that a ticket for a foreign orchestra concert is priced 50-100 percent higher than its quality as measured based on the model in this paper. The simulation, through using the model estimates, derives an interesting implication that monopolist's profit maximizing behavior could raise the product quality above an optimal level from the economic cost-benefit viewpoint. (C) 2002 Elsevier Science B.V. All rights reserved.