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Preemption, Predation, and Minimum Quality Standards

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Author Info
Mina Baliamoune ()
Stefan Lutz ()

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Abstract

We present a model of vertical product differentiation and exit where a domestic and a foreign firm face fixed setup costs and quality-dependent costs of production and compete in quality and price in the domestic market. Quality-dependent costs are quadratic in qualities, but independent of the quantities produced. The domestic government may impose a minimum quality standard binding for both foreign and domestic firms. In the presence of an initial cost advantage of the domestic firm, a sufficiently high minimum quality standard set by the domestic government will enable the domestic firm to induce exit of the foreign firm, i.e. to engage in predation. However, the same standard would lead to predation by the foreign firm, if the foreign firm had the initial cost advantage!

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Publisher Info
Paper provided by ICER - International Centre for Economic Research in its series ICER Working Papers with number 20-2009.

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Length: 23 pages
Date of creation: Jul 2009
Date of revision:
Handle: RePEc:icr:wpicer:20-2009

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Related research
Keywords: vertical product differentiation; oligopoly; trade; quality; country asymmetries;

Find related papers by JEL classification:
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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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Stefan Lutz & Mina Baliamoune-Lutz, 2003. "Mutual Recognition of National Minimum Quality Standards may Support International Convergence," Journal of Industry, Competition and Trade, Springer, vol. 3(4), pages 293-311, December. [Downloadable!]
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  2. Richard A. Posner, 1974. "Theories of Economic Regulation," NBER Working Papers 0041, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Donnenfeld, S. & Weber, S., 1991. "Limit Qualities and Entry Deterrence," Papers 92-4, York (Canada) - Department of Economics.
    Other versions:
  4. Garella, Paolo G., 2006. ""Innocuous" minimum quality standards," Economics Letters, Elsevier, vol. 92(3), pages 368-374, September. [Downloadable!] (restricted)
    Other versions:
  5. Lutz, Stefan, 1996. "Minimum Quality Standards as Facilitating Devices: An Example with Leapfrogging and Exit," CEPR Discussion Papers 1522, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  6. Hallak, Juan Carlos, 2006. "Product quality and the direction of trade," Journal of International Economics, Elsevier, vol. 68(1), pages 238-265, January. [Downloadable!] (restricted)
  7. 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. [Downloadable!] (restricted)
  8. Richard A. Posner, 1971. "Taxation by Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 22-50, Spring. [Downloadable!] (restricted)
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  10. Valletti, Tommaso M, 2000. "Minimum Quality Standards under Cournot Competition," Journal of Regulatory Economics, Springer, vol. 18(3), pages 235-45, November. [Downloadable!] (restricted)
  11. Phlips, Louis, 1996. "On the detection of collusion and predation," European Economic Review, Elsevier, vol. 40(3-5), pages 495-510, April. [Downloadable!] (restricted)
  12. Naoto Jinji & Tsuyoshi Toshimitsu, 2004. "Minimum Quality Standards under Asymmetric Duopoly with Endogenous Quality Ordering: A Note," Journal of Regulatory Economics, Springer, vol. 26(2), pages 189-199, 09. [Downloadable!]
  13. Constantatos, Christos & Perrakis, Stylianos, 1998. "Minimum Quality Standards, Entry, and the Timing of the Quality Decision," Journal of Regulatory Economics, Springer, vol. 13(1), pages 47-58, January. [Downloadable!] (restricted)
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  16. Lutz, Stefan & Lyon, Thomas P & Maxwell, John W, 2000. "Quality Leadership When Regulatory Standards Are Forthcoming," Journal of Industrial Economics, Blackwell Publishing, vol. 48(3), pages 331-48, September. [Downloadable!] (restricted)
  17. Motta, Massimo & Thisse, Jacques-Francois & Cabrales, Antonio, 1997. "On the Persistence of Leadership or Leapfrogging in International Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(4), pages 809-24, November.
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  18. Herguera, Inigo & Kujal, Praveen & Petrakis, Emmanuel, 2002. "Tariffs, quality reversals and exit in vertically differentiated industries," Journal of International Economics, Elsevier, vol. 58(2), pages 467-492, December. [Downloadable!] (restricted)
  19. Jaskold Gabszewicz, J. & Thisse, J. -F., 1979. "Price competition, quality and income disparities," Journal of Economic Theory, Elsevier, vol. 20(3), pages 340-359, June. [Downloadable!] (restricted)
  20. Uri Ronnen, 1991. "Minimum Quality Standards, Fixed Costs, and Competition," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 490-504, Winter. [Downloadable!] (restricted)
  21. Ecchia, Giulio & Lambertini, Luca, 1997. "Minimum Quality Standards and Collusion," Journal of Industrial Economics, Blackwell Publishing, vol. 45(1), pages 101-13, March. [Downloadable!] (restricted)
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  22. Crampes, Claude & Hollander, Abraham, 1995. "Duopoly and quality standards," European Economic Review, Elsevier, vol. 39(1), pages 71-82, January. [Downloadable!] (restricted)
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  23. Laffont, Jean-Jacques & Tirole, Jean, 1991. "The Politics of Government Decision-Making: A Theory of Regulatory Capture," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1089-127, November. [Downloadable!] (restricted)
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  24. Siebert, Ralph, 2003. "Credible Vertical Preemption," CEPR Discussion Papers 4089, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  25. George J. Stigler, 1971. "The Theory of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 3-21, Spring. [Downloadable!] (restricted)
  26. Maxwell, John W., 1998. "Minimum quality standards as a barrier to innovation," Economics Letters, Elsevier, vol. 58(3), pages 355-360, March. [Downloadable!] (restricted)
  27. Daniel Sturm, 2006. "Product standards, trade disputes, and protectionism," Canadian Journal of Economics, Canadian Economics Association, vol. 39(2), pages 564-581, May. [Downloadable!] (restricted)
  28. Boom, Anette, 1995. "Asymmetric International Minimum Quality Standards and Vertical Differentiation," Journal of Industrial Economics, Blackwell Publishing, vol. 43(1), pages 101-19, March. [Downloadable!] (restricted)
  29. Donnenfeld, Shabtai & Weber, Shlomo, 1992. "Vertical product differentiation with entry," International Journal of Industrial Organization, Elsevier, vol. 10(3), pages 449-472, September. [Downloadable!] (restricted)
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