A Note on Strategic Trade Policy and Endogenous Quality Choice *

Review of International Economics, 2008, vol. 16, issue 1, pages 173-185

Abstract: This paper shows that some of the main policy implications in Park (2001) and Zhou, Spencer, and Vertinsky (2002) are sensitive to their assumptions on marginal production costs. The unilaterally optimal policy for investment towards quality improvement is analyzed, assuming constant and non-negative marginal production costs under vertically differentiated international duopoly. If marginal production costs are different across firms, the optimal policy for each exporting country may be opposite in its sign from that shown by the existing papers under Bertrand competition. The policy reversal may also occur for the low-quality exporting country under Cournot competition. Copyright © 2008 The Authors; Journal compilation © 2008 Blackwell Publishing Ltd.

Date: 2008

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