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The Effects of Minimum Quality Standards: Better or Worse Products?

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Abstract

In a duopoly where two firms’ products are differentiated both, horizontally and vertically, introduction of a quality standard affects equilibrium quality levels of both firms. The effects, furthermore, depend upon consumers being or not perfectly informed about qualities. Qualities are strategic substitutes and under perfect information only non-innocuous standards, i.e. above the lowest quality in an unregulated equilibrium, change the equilibrium. However, the average quality in the market may go down due to the standard, because the high quality firm will lower its own quality, and total consumers welfare may decrease. Under uncertainty, even innocuous standards, below the lowest unregulated equilibrium quality, may alter the equilibrium quality choices.

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  • P. Garella, 2003. "The Effects of Minimum Quality Standards: Better or Worse Products?," Working Papers 484, Dipartimento Scienze Economiche, Universita' di Bologna.
  • Handle: RePEc:bol:bodewp:484
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    References listed on IDEAS

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    1. Scarpa, Carlo, 1998. "Minimum quality standards with more than two firms1," International Journal of Industrial Organization, Elsevier, vol. 16(5), pages 665-676, September.
    2. Crampes, Claude & Hollander, Abraham, 1995. "Duopoly and quality standards," European Economic Review, Elsevier, vol. 39(1), pages 71-82, January.
    3. Uri Ronnen, 1991. "Minimum Quality Standards, Fixed Costs, and Competition," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 490-504, Winter.
    4. Maxwell, John W., 1998. "Minimum quality standards as a barrier to innovation," Economics Letters, Elsevier, vol. 58(3), pages 355-360, March.
    5. Boom, Anette, 1995. "Asymmetric International Minimum Quality Standards and Vertical Differentiation," Journal of Industrial Economics, Wiley Blackwell, vol. 43(1), pages 101-119, March.
    6. Leland, Hayne E, 1979. "Quacks, Lemons, and Licensing: A Theory of Minimum Quality Standards," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1328-1346, December.
    7. Ecchia, Giulio & Lambertini, Luca, 1997. "Minimum Quality Standards and Collusion," Journal of Industrial Economics, Wiley Blackwell, vol. 45(1), pages 101-113, March.
    8. Lutz, Stefan & Lyon, Thomas P & Maxwell, John W, 2000. "Quality Leadership When Regulatory Standards Are Forthcoming," Journal of Industrial Economics, Wiley Blackwell, vol. 48(3), pages 331-348, September.
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    Cited by:

    1. P. Garella, 2004. "Are "innocuous" Minimum Quality Standards really innocuous?," Working Papers 515, Dipartimento Scienze Economiche, Universita' di Bologna.
    2. Paolo Garella & Emmanuel Petrakis, 2008. "Minimum quality standards and consumers’ information," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 36(2), pages 283-302, August.
    3. Jørgen Drud Hansen & Jørgen Ulff-Møller Nielsen, 2010. "Price as an Indicator for Quality in International Trade?," International Economic Journal, Taylor & Francis Journals, vol. 25(3), pages 419-430, April.
    4. Jørgen Hansen & Jørgen Nielsen, 2009. "Dumping and Injury Margins in Markets with Horizontal as well as Vertical Product Differentiation," Journal of Industry, Competition and Trade, Springer, vol. 9(3), pages 233-250, September.

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