Minimum Quality Standards and Equilibrium Selection with Asymmetric Firms

Olivier Bonroy () and Christos Constantatos ()

Industrial Organization from EconWPA

Abstract: In a vertically differentiated market with cost asymmetries, the risk dominance criterion selects the equilibrium where the high quality is produced by the efficient firm. We show that a sufficiently high Minimum Quality Standard reverses equilibrium selection. Hence, MQS may be used in order to increase a domestic firm's profit at the expense of a more efficient foreign rival. This produces higher domestic and lower world welfare. Since the protectionist impact of MQS comes through equilibrium targeting rather than directly affecting equilibrium outcomes, it cannot be easily detected.

Keywords: Vertical product differentiation; Minimum quality standards; Equilibrium selection; Protectionism (search for similar items in EconPapers)
JEL-codes: F13 (search for similar items in EconPapers)
Date: 2005-06-17
Note: Type of Document - pdf
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Related works:
Working Paper: Minimum Quality Standards and Equilibrium Selection with Asymmetric Firms (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpio:0506009

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