This dissertation builds on earlier works by analyzing the provision of product quality by a monopolist and comparing that to a social planner. This paper extends the analysis of this problem to the discrete quality setting. Earlier works focused on a continuum of qualities and found no quality distortion for the highest qualities, but downward quality distortion for lower qualities. The results in the discrete setting differ in that there can be an upward distortion of qualities provided by the monopolist for the highest qualities. The key to this distortion is that the monopolist focuses on the profit that can be extracted from the group of consumers that value quality the most. When there are neither too many nor only a few of these consumers relative to other market segments, it can lead the monopolist to bias its quality provision to extract more value from the these consumers. This effect distorts quality at the high-end as compared to the social planner. This upward distortion of quality is found in the real world. In Texas, 30.6% of cable service providers offers an upward distorted service for higher taste consumers. Besides the quality issue, I also examine how consumer distributions affect price, profit, and social welfare. Under the various hypothetical consumer distributions, I simulate the above values, and I observe the effect of distribution changes. When I apply this tool to the real data from Texas cable service industry, I can simulate the consumer type distribution in each franchise, and I can construct the demand curve. Finding consumer type distribution is the key for the demand estimation in this structure.
