The important characteristic of international competition between developed and less developed countries is vertical product differentiation, where firms' quality choices represent strategic decisions. Unlike the previous literature, we allow for a leadership in quality choice and the possibility of imitation and learning by the domestic firm. We compare both positive and normative aspects of this setup in the free trade and the strategic trade policy regime and show that the value of leadership may change dramatically when moving from free trade to trade policy. We also identify conditions under which trade policy can initiate the change in the quality ladders (known as quality reversal) and demonstrate that such a policy has a somewhat limited scope to achieve it. Thus, free trade can still be an optimal trade arrangement.
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Paper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number
wp336.
Find related papers by JEL classification: D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
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