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Vertical product differentiation, minimum quality standards, and international trade

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  • Dimitra Petropoulou

Abstract

This paper develops a two-country, vertically differentiated duopoly model so as to analyse incentives for the formulation of national minimum quality standards in an open economy setting. Markets are segmented and national firms compete in both markets forming an international duopoly. Firms incur quality-dependent variable costs and goods sold domestically and abroad can have distinct qualities, while national quality standards are endogenously determined. International trade links give rise to cross-country externalities that result in inefficient national quality standards, either too lax or too tough relative to the global welfare-maximizing international standard. Trade flows are shown to be lower under Nash equilibrium minimum standards than under world optimum standards. Moreover, if firms specialize in goods of different quality levels, then world optimum standards are unattainable through reciprocal adjustments in national standards, in the absence of lump sum transfers. This suggests limitations in the effectiveness of international negotiations over minimum quality standards. Copyright 2013 Oxford University Press 2012 All rights reserved, Oxford University Press.

Suggested Citation

  • Dimitra Petropoulou, 2013. "Vertical product differentiation, minimum quality standards, and international trade," Oxford Economic Papers, Oxford University Press, vol. 65(2), pages 372-393, April.
    • Handle: RePEc:oup:oxecpp:v:65:y:2013:i:2:p:372-393
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    File URL: http://hdl.handle.net/10.1093/oep/gps023
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    Cited by:

    1. Baumann, Florian, 2015. "Freier Warenverkehr und unverfälschter Wettbewerb in der Europäischen Union: Der Beitrag der europäischen Produkthaftung," DICE Ordnungspolitische Perspektiven 75, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    2. Ourania Karakosta, 2018. "Tax Competition in Vertically Differentiated Markets with Environmentally Conscious Consumers," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 69(4), pages 693-711, April.
    3. Voßwinkel, Jan & Birg, Laura, 2015. "Minimum Quality Standards and Non-Compliance," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112883, Verein für Socialpolitik / German Economic Association.
    4. Yasushi Kawabata & Yasuhiro Takarada, 2021. "Deep trade agreements and harmonization of standards," Southern Economic Journal, John Wiley & Sons, vol. 88(1), pages 118-143, July.
    5. Katia Berti & Rod Falvey, 2018. "Does trade weaken product standards?," Review of International Economics, Wiley Blackwell, vol. 26(4), pages 852-868, September.
    6. Birg, Laura & Voßwinkel, Jan S., 2015. "Minimum quality standards and exports," University of Göttingen Working Papers in Economics 248, University of Goettingen, Department of Economics.
    7. Beguin, Malo, 2021. "Harmonization, Mutual Recognition or National Treatment: a Melitz approach," LIDAM Discussion Papers LFIN 2021010, Université catholique de Louvain, Louvain Finance (LFIN).
    8. Jianyu Yu & Zohra Bouamra-Mechemache & Angelo Zago, 2018. "What is in a Name? Information, Heterogeneity, and Quality in a Theory of Nested Names," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 100(1), pages 286-310.

    More about this item

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods

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