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Quantity restrictions and endogenous quality choice

  • Herguera, Inigo
  • Kujal, Praveen
  • Petrakis, Emmanuel

In this paper we show that in an imperfectly competitive market the imposition of quantity restrictions at, or less than, the free trade equilibrium has important strategic effects on the choice of quality. In a vertical product differentiation model where foreign and domestic firms compete in quantities, both firms respond by lowering their qualities for a restriction at, or close enough, to the free trade level. If the restriction is substantially smaller than the free trade equilibrium an increase in average quality is observed only when the foreign firm produces the low quality. The change in quality depends not only on whether the recipient is a high, or low, quality foreign firm. It also depends on how restrictive the constraints are.

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Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 18 (2000)
Issue (Month): 8 (December)
Pages: 1259-1277

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Handle: RePEc:eee:indorg:v:18:y:2000:i:8:p:1259-1277
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505551

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  1. Krishna, Kala, 1989. "Trade restrictions as facilitating practices," Journal of International Economics, Elsevier, vol. 26(3-4), pages 251-270, May.
  2. Shaked, Avner & Sutton, John, 1983. "Natural Oligopolies," Econometrica, Econometric Society, vol. 51(5), pages 1469-83, September.
  3. Motta, Massimo, 1993. "Endogenous Quality Choice: Price vs. Quantity Competition," Journal of Industrial Economics, Wiley Blackwell, vol. 41(2), pages 113-31, June.
  4. Richard Harris, 1984. "Why Voluntary Export Restraints are 'Voluntary'," Working Papers 559, Queen's University, Department of Economics.
  5. Avner Shaked & John Sutton, 1982. "Relaxing Price Competition Through Product Differentiation," Review of Economic Studies, Oxford University Press, vol. 49(1), pages 3-13.
  6. Jaskold Gabszewicz, J. & Thisse, J. -F., 1980. "Entry (and exit) in a differentiated industry," Journal of Economic Theory, Elsevier, vol. 22(2), pages 327-338, April.
  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.
  8. Analysis, A Welfare & Das, Satya P. & Donnenfeld, Shabtai, 1987. "Trade policy and its impact on quality of imports," Journal of International Economics, Elsevier, vol. 23(1-2), pages 77-95, August.
  9. Falvey, Rodney E, 1979. "The Composition of Trade within Import-restricted Product Categories," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 1105-14, October.
  10. Aw, Bee Yan & Roberts, Mark J., 1986. "Measuring quality change in quota-constrained import markets: The Case of U.S. Footwear," Journal of International Economics, Elsevier, vol. 21(1-2), pages 45-60, August.
  11. Kala Krishna, 1990. "Export Restraints With Imperfect Competition: A Selective Survey," NBER Working Papers 3244, National Bureau of Economic Research, Inc.
  12. Gabszewicz, Jean Jaskold & Thisse, Jacques-Francois, 1986. "On the Nature of Competition with Differentiated Products," Economic Journal, Royal Economic Society, vol. 96(381), pages 160-72, March.
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