COMPETING ON VOLUME OR VALUE? REPUTATION AND TIMING IN RESTAURANT INDUSTRY

Abstract

By considering a market competition with two asymmetric restaurants, this paper presents a comparative analysis of two dynamic duopoly models tailored to the restaurant industry, integrating principles of industrial organization and game theory. The first framework examines a Stackelberg (sequential) quantity competition where restaurants determine quality levels simultaneously before competing sequentially in output. Conversely, the second framework introduces a sequential quality competition model, wherein the smaller restaurant acts as the quality leader, while subsequent quantity decisions are made simultaneously. Both models examine how restaurant reputation shapes equilibrium quality, output, profits, consumer surplus and social welfare. By comparing two frameworks, we demonstrate that reputation asymmetry is a primary driver of market dominance and strategic positioning, though its impact is conditional on the decision-making sequence. In a Stackelberg quantity model, the high-reputation restaurant systematically dominates the market, leveraging its status to increase both quality and output while capturing superior profits. Conversely, in a sequential quality model, the timing of quality decisions serves as a strategic lever; leadership in quality can partially mitigate reputational disadvantages, allowing smaller restaurants to secure strategic gains under specific conditions. This research highlights the joint impact of reputation and decision-making sequences on market efficiency, contributing new insights to the literature on food industry competition.