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 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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Date of creation: 17 Jun 2005
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Vertical product differentiation; Minimum quality standards; Equilibrium selection; Protectionism;
Other versions of this item:
- Olivier Bonroy & Christos Constantatos, 2008. "Minimum Quality Standards and Equilibrium Selection with Asymmetric Firms," Discussion Paper Series 2008_13, Department of Economics, University of Macedonia, revised Oct 2008.
- F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-06-27 (All new papers)
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