Vertical Product Differentiation, Minimum Quality Standards and International Trade

Dimitra Petropoulou (d.petropoulou@lse.ac.uk)

No 352, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: This paper extends a well-established vertical product differentiation model to an international duopoly with two segmented countries, where firms compete in quality and price. The framework is used to analyse governments` incentives for unilateral minimum standard-setting as well as the scope and effects of cooperative agreements in minimum standards. Endogenous national standards result from a standard-setting game between governments whose objective function is to maximise national welfare. Cross-country externalities can be are either positive or negative, depending on the quality of traded goods. Four unregulated Nash equilibria in minimum standards are shown to exist, two symmetric and two asymmetric, which correspond to the four different combinations of externalities that may arise between the two countries: symmetric positive externalities, symmetric negative externalities, or asymmetric positive and negative externalities. Unilateral minimum standards can be inefficiently high or low relative to world optimum symmetric standards and operate as non-tariff barriers to trade. Harmonisation of minimum quality standards through cooperation is both feasible and mutually beneficial in the symmetric case, but the scope for mutually beneficial cooperation is significantly restricted when countries are asymmetric and lump-sum transfers are not possible. The resulting cooperative standards are asymmetric and do not maximise world welfare.

Keywords: Vertical Product Differentiation; Quality Reversal; International Trade; Minimum Quality Standards (search for similar items in EconPapers)
JEL-codes: F13 L13 L52 (search for similar items in EconPapers)
Date: 2007-09-01
New Economics Papers: this item is included in nep-com, nep-dcm, nep-int and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://ora.ox.ac.uk/objects/uuid:2ebff022-cd58-49c3-9177-a31b0eb7273d (text/html)

Related works:
Journal Article: Vertical product differentiation, minimum quality standards, and international trade (2013)
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:oxf:wpaper:352

Access Statistics for this paper

More papers in Economics Series Working Papers from University of Oxford, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Anne Pouliquen (facultyadmin@economics.ox.ac.uk this e-mail address is bad, please contact repec@repec.org).