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Strategic trade policy with endogenous choice of quality and asymmetric costs

  • Zhou, Dongsheng
  • Spencer, Barbara J.
  • Vertinsky, Ilan

This paper examines the strategic trade policy incentives for investment policies towards quality improvements in a vertically differentiated exporting industry. Firms first compete in qualities and then export to a third country market based on Bertrand or Cournot competition. Optimal policies are asymmetric across the two producing countries. Under Bertrand competition, the low-quality country subsidizes investment to raise export quality, while the high-quality country imposes a tax so as to reduce the quality of its already high quality exports. Under Cournot competition, the results are reversed with a tax in the low-quality country and a subsidy in the high-quality country.

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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 56 (2002)
Issue (Month): 1 (January)
Pages: 205-232

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Handle: RePEc:eee:inecon:v:56:y:2002:i:1:p:205-232
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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