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The Effect of Quotas on Domestic Product Price and Quality

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  • Stefan Lutz

Abstract

A quota on foreign competition generally leads to quality upgrading (downgrading) of the low-quality (high-quality) firm, an increase in average quality, a reduction of quality differentiation, and a reduction of domestic consumer surplus, irrespective of whether the foreign firm produces higher or lower quality. Effects of a quota on industry profits and domestic welfare depend on the direction of international vertical differentiation. If the foreign firm produces low quality, both firms’ prices and profits rise but domestic welfare falls. This describes well some major effects of a Japanese Voluntary Export Restraint (VER) in the U.S. auto market and relevant empirical findings. If the foreign firm produces high quality, foreign profits will fall. Since domestic consumer surplus falls only unsubstantially, domestic profit gains lead to an increase of domestic welfare. Copyright International Atlantic Economic Society 2005

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Bibliographic Info

Article provided by Springer in its journal International Advances in Economic Research.

Volume (Year): 11 (2005)
Issue (Month): 2 (May)
Pages: 163-173

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Handle: RePEc:kap:iaecre:v:11:y:2005:i:2:p:163-173

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Web page: http://www.springerlink.com/link.asp?id=112112

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References

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  1. Robert C. Feenstra, 1993. "Measuring the Welfare Effect of Quality Change: Theory and Application of Japanese Autos," NBER Working Papers 4401, National Bureau of Economic Research, Inc.
  2. Deneckere, R.J. & Kovenock, D. & Sohn, Y.Y., 1991. "Quotas and Tariffs with Endogenous Conduct," Purdue University Economics Working Papers 1006, Purdue University, Department of Economics.
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  7. Herguera, Inigo & Kujal, Praveen & Petrakis, Emmanuel, 2000. "Quantity restrictions and endogenous quality choice," International Journal of Industrial Organization, Elsevier, vol. 18(8), pages 1259-1277, December.
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  9. Anderson, James E, 1985. "The Relative Inefficiency of Quotas: The Cheese Case," American Economic Review, American Economic Association, vol. 75(1), pages 178-90, March.
  10. Falvey, Rodney E, 1979. "The Composition of Trade within Import-restricted Product Categories," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 1105-14, October.
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  13. Krishna, Kala, 1989. "Trade restrictions as facilitating practices," Journal of International Economics, Elsevier, vol. 26(3-4), pages 251-270, May.
  14. Motta, Massimo, 1993. "Endogenous Quality Choice: Price vs. Quantity Competition," Journal of Industrial Economics, Wiley Blackwell, vol. 41(2), pages 113-31, June.
  15. Lutz, Stefan H., 2002. "The Effects of Quotas on Vertical Intra-Industry Trade," ZEW Discussion Papers 02-61, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  16. James Levinsohn, 1988. "Empirics of Taxes on Differentiated Products: The Case of Tariffs in the U.S. Automobile Industry," NBER Chapters, in: Trade Policy Issues and Empirical Analysis, pages 9-44 National Bureau of Economic Research, Inc.
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  18. Das, Satya P. & Donnenfeld, Shabtai, 1989. "Oligopolistic competition and international trade : Quantity and quality restrictions," Journal of International Economics, Elsevier, vol. 27(3-4), pages 299-318, November.
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  20. BOCCARD, Nicolas & WAUTHY, Xavier, 1998. "Import restraints and quality choice under vertical differentiation," CORE Discussion Papers 1998018, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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Cited by:
  1. Dimitra Petropoulou, 2013. "Vertical product differentiation, minimum quality standards, and international trade," Oxford Economic Papers, Oxford University Press, vol. 65(2), pages 372-393, April.
  2. Dimitra Petropoulou, 2008. "International Trade, Minimum Quality Standards and the Prisoners' Dilemma," CEP Discussion Papers dp0858, Centre for Economic Performance, LSE.
  3. Dimitra Petropoulou, 2008. "International trade, minimum quality standards and the prisoners' dilemma," LSE Research Online Documents on Economics 19626, London School of Economics and Political Science, LSE Library.

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