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The Effect of Quotas on Domestic Product Price and Quality

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  • Stefan Lutz

Abstract

A quota on foreign competition generally leads to quality upgrading (downgrading) of the low-quality (high-quality) firm, an increase in average quality, a reduction of quality differentiation, and a reduction of domestic consumer surplus, irrespective of whether the foreign firm produces higher or lower quality. Effects of a quota on industry profits and domestic welfare depend on the direction of international vertical differentiation. If the foreign firm produces low quality, both firms’ prices and profits rise but domestic welfare falls. This describes well some major effects of a Japanese Voluntary Export Restraint (VER) in the U.S. auto market and relevant empirical findings. If the foreign firm produces high quality, foreign profits will fall. Since domestic consumer surplus falls only unsubstantially, domestic profit gains lead to an increase of domestic welfare. Copyright International Atlantic Economic Society 2005

Suggested Citation

  • Stefan Lutz, 2005. "The Effect of Quotas on Domestic Product Price and Quality," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 11(2), pages 163-173, May.
  • Handle: RePEc:kap:iaecre:v:11:y:2005:i:2:p:163-173:10.1007/s11294-005-3013-x
    DOI: 10.1007/s11294-005-3013-x
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    Keywords

    F12;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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