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Minimum Quality Standards and Equilibrium Selection with Asymmetric Firms

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Author Info
Olivier Bonroy (CRÉA, Laval University)
Christos Constantatos (University of Macedonia)

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Abstract

In 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 Minimum Quality 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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Paper provided by EconWPA in its series Industrial Organization with number 0506009.

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Date of creation: 17 Jun 2005
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Handle: RePEc:wpa:wuwpio:0506009

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Related research
Keywords: Vertical product differentiation; Minimum quality standards; Equilibrium selection; Protectionism;

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Find related papers by JEL classification:
F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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  1. Zhou, Dongsheng & Spencer, Barbara J. & Vertinsky, Ilan, 2002. "Strategic trade policy with endogenous choice of quality and asymmetric costs," Journal of International Economics, Elsevier, vol. 56(1), pages 205-232, January. [Downloadable!] (restricted)
    Other versions:
  2. Motta, Massimo, 1993. "Endogenous Quality Choice: Price vs. Quantity Competition," Journal of Industrial Economics, Blackwell Publishing, vol. 41(2), pages 113-31, June. [Downloadable!] (restricted)
  3. John C. Harsanyi & Reinhard Selten, 1988. "A General Theory of Equilibrium Selection in Games," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262582384.
  4. Scarpa, Carlo, 1998. "Minimum quality standards with more than two firms1," International Journal of Industrial Organization, Elsevier, vol. 16(5), pages 665-676, September. [Downloadable!] (restricted)
  5. Moraga-Gonzalez, Jose Luis & Viaene, Jean-Marie, 2005. "Trade policy and quality leadership in transition economies," European Economic Review, Elsevier, vol. 49(2), pages 359-385, February. [Downloadable!] (restricted)
  6. 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)
  7. Nicolas Boccard & Xavier Wauthy, 2005. "Enforcing Domestic Quality Dominance through Quotas," Review of International Economics, Blackwell Publishing, vol. 13(2), pages 250-261, 05. [Downloadable!] (restricted)
  8. Carlsson, Hans & van Damme, Eric, 1993. "Global Games and Equilibrium Selection," Econometrica, Econometric Society, vol. 61(5), pages 989-1018, September. [Downloadable!] (restricted)
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  9. Valletti, Tommaso M, 2000. "Minimum Quality Standards under Cournot Competition," Journal of Regulatory Economics, Springer, vol. 18(3), pages 235-45, November. [Downloadable!] (restricted)
  10. 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!]
  11. 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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  12. 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)
  13. 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)
  14. 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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  15. Fischer, Ronald & Serra, Pablo, 2000. "Standards and protection," Journal of International Economics, Elsevier, vol. 52(2), pages 377-400, December. [Downloadable!] (restricted)
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  16. 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)
  17. Antonio Cabrales & Walter Garcia Fontes & Massimo Motta, 1997. "Risk Dominance Selects the Leader. An Experimental Analysis," Economics Working Papers 222, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
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  18. Van Huyck, John B & Battalio, Raymond C & Beil, Richard O, 1990. "Tacit Coordination Games, Strategic Uncertainty, and Coordination Failure," American Economic Review, American Economic Association, vol. 80(1), pages 234-48, March. [Downloadable!] (restricted)
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Cited by:
(explanations, 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. Mario Pezzino, 2006. "Minimum quality standards with more than two firms under Cournot competition," The School of Economics Discussion Paper Series 0613, Economics, The University of Manchester. [Downloadable!]
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