Vertical product differentiation, minimum quality standards and international trade

Petropoulou, Dimitra (2013) Vertical product differentiation, minimum quality standards and international trade. Oxford Economic Papers, 65 (2). pp. 372-393. ISSN 1471-0498

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This paper develops a two-country, vertically differentiated duopoly model so as to analyse incentives for the formulation of national minimum quality standards in an open economy setting. Markets are segmented and national firms compete in both markets forming an international duopoly. Firms incur quality-dependent variable costs and goods sold domestically and abroad can have distinct qualities, while national quality standards are endogenously determined. International trade links give rise to cross-country externalities that result in inefficient national quality standards, either too lax or too tough relative to the global welfare-maximising international standard. Trade flows are shown to be lower under Nash equilibrium minimum standards than under world optimum standards. Moreover, if firms specialise in goods of different quality levels, then world optimum standards are unattainable through reciprocal adjustments in national standards, in the absence of lump sum transfers. This suggests limitations in the effectiveness of international negotiations over minimum quality standards.

Item Type: Article
Schools and Departments: University of Sussex Business School > Economics
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Depositing User: Dimitra Petropoulou
Date Deposited: 22 May 2012 10:13
Last Modified: 22 May 2013 14:27
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