Minimum Quality Standards and Equilibrium Selection with Asymmetric Firms
AbstractIn a vertically differentiated market with cost asymmetries, the risk dominance criterion selects the equilibrium where the high quality is produced by the efficient firm. We show that a sufficiently high MinimumQuality Standard reverses equilibrium selection. Hence, MQS may be used in order to increase a domestic firm’s profit at the expense of a more efficient foreign rival. This produces higher domestic and lower world welfare. Since the protectionist impact of MQS comes through equilibrium targeting rather than directly affecting equilibrium outcomes, it cannot be easily detected.
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Bibliographic InfoPaper provided by Department of Economics, University of Macedonia in its series Discussion Paper Series with number 2008_13.
Date of creation: Oct 2008
Date of revision: Oct 2008
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Vertical product differentiation; Minimum quality standards; Equilibrium selection; Protectionism.;
Other versions of this item:
- Olivier Bonroy & Christos Constantatos, 2005. "Minimum Quality Standards and Equilibrium Selection with Asymmetric Firms," Industrial Organization 0506009, EconWPA.
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- L5 - Industrial Organization - - Regulation and Industrial Policy
- F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-10-13 (All new papers)
- NEP-BEC-2008-10-13 (Business Economics)
- NEP-COM-2008-10-13 (Industrial Competition)
- NEP-MIC-2008-10-13 (Microeconomics)
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