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Import Restraints and Quality Choice Under Vertical Differentiation

Author

Listed:
  • Boccard, N.

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE))

  • Wauthy, X.

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) ; Belgian National Fund for Scientific Research (FNRS))

Abstract

We consider the following stage game : A domestic government chooses an import quota, then a domestic and a foreign firm choose their quality level before engaging a price competition in the final stage. We first show that the indirect effect of the quota on the sales of the domestic producer are different depending on whether his product quality is the high or low. In particular, the analysis developed in Krishna (89) has to be amended when vertical, instead of horizontal, product differentiation applies. Despite the non-existence of pure strategy Nash equilibria, we characterise all equilibria of the pricing game and go backward to tackle the quality choice game : for loose quotas, both firms choose Top quality while only one differentiates for tighter quotas. We then put forward the idea that the domestic government should use quotas to reduce the price competition and enable both firms to upgrade to the highest possible quality level to the benefit of domestic consumers. On the contrary, the foreign firm would prefer a very loose quota that generates quality differentiation and larger profits for her.

Suggested Citation

  • Boccard, N. & Wauthy, X., 1998. "Import Restraints and Quality Choice Under Vertical Differentiation," LIDAM Discussion Papers IRES 1998008, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    • Handle: RePEc:ctl:louvir:1998008
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    Citations

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    Cited by:

    1. Nicolas Boccard & Xavier Wauthy, 2003. "Optimal Quotas, Price Competition And Products' Attributes," The Japanese Economic Review, Japanese Economic Association, vol. 54(4), pages 395-408, December.
    2. repec:kap:iaecre:v:11:y:2005:i:2:p:163-173 is not listed on IDEAS
    3. Stefan Lutz, 2005. "The Effect of Quotas on Domestic Product Price and Quality," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 11(2), pages 163-173, May.
    4. Lutz, Stefan H., 2002. "The Effects of Quotas on Vertical Intra-Industry Trade," ZEW Discussion Papers 02-61, ZEW - Leibniz Centre for European Economic Research.

    More about this item

    Keywords

    international trade; quality; optimal quota; price competition;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • 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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