Minimum Quality Standard and International Rivalry in Quality and Price [chapter]

Pei-Cheng Liao, Kar-yiu Wong
Contributions to Economics  
This paper examines the policy interactions between two governments in an international duopoly model with vertical product differentiation, in which the foreign firm produces the low-quality good and exports to the home market. Whether the home government imposes a specific tariff or not, the foreign government has an incentive to set a minimum quality standard (MQS) on its exports, and the level of MQS decreases as the specific tariff increases. If the cost asymmetry between two firms is
more » ... n two firms is small enough, a foreign MQS can induce the home government to set the tariff below the prohibitive level, allowing more exports to the home country. However, if the foreign government is inactive, the home government will always set a high tariff close to the prohibitive tariff to allow a small trade from the foreign country. This paper shows that a MQS policy adopted by the foreign government not only helps the foreign firm behave as a Stackelberg leader to choose the quality level ahead of the home firm, but also serves as a strategic instrument to reduce the tariff imposed on its exports.
doi:10.1007/3-7908-1630-2_16 fatcat:zryi53523zem3pomxtbi2dsbs4