Vertical Strategy with Quality Differentiation in an Import-competing Market

Kangsik Choi () and Seonyoung Lim ()
Additional contact information
Kangsik Choi: Pusan National University
Seonyoung Lim: Mokpo National University

Journal of Industry, Competition and Trade, 2024, vol. 24, issue 1, No 14, 21 pages

Abstract: Abstract We examine the vertical strategies of home and foreign manufacturers that produce quality-differentiated products. In contrast to previous results that showed vertical separation as the dominant strategy, we find that the home manufacturer opts for vertical separation, while the foreign manufacturer chooses vertical integration under Bertrand competition. This is because the government of the importing country aims to increase consumer surplus by imposing tariffs, which allows the foreign manufacturer to export high-quality products at lower prices. Under Cournot competition, both manufacturers maintain a vertical separation strategy. However, if the quality levels of products are low, both manufacturers obtain higher profits when they choose vertical integration. This leads to a prisoner’s dilemma situation for both manufacturers. In the case of a free trade policy, manufacturers always choose the separation strategy. Under Bertrand competition, integration leads to higher output levels and increases social welfare for the importing country due to the high level of importation of high-quality products, suggesting the tariff policy drive the foreign manufacturer towards integration.

Keywords: Quality differentiation; Vertical separation; Integration; Tariff (search for similar items in EconPapers)
JEL-codes: F12 F13 L13 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s10842-024-00427-4 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:jincot:v:24:y:2024:i:1:d:10.1007_s10842-024-00427-4

Ordering information: This journal article can be ordered from
http://www.springer. ... on/journal/10842/PS2

DOI: 10.1007/s10842-024-00427-4

Access Statistics for this article

Journal of Industry, Competition and Trade is currently edited by Karl Aiginger, Marcel Canoy and Michael Peneder

More articles in Journal of Industry, Competition and Trade from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().