Strategic Trade Policy and Vertical Product Differentiation: intra-industry trade between developed and developing countries
We analyse the effects of simple strategic trade policy in a duopoly with vertical product differentiation where firms from a developed and less developed country compete in both qualities and prices in the domestic market. The distinction between the developed and developing country firm is captured through the difference in the marginal efficiency in production of quality, where the latter has lower marginal efficiency than the former. We concentrate on the case when the domestic market is in a less developed country and when it possesses the characteristics of a "natural duopoly". That is, the size of the market is such that only two firms can survive in it. We analyse under which conditions welfare maximising trade policy in the form of tariffs can lead to so-called quality reversal, that is, to the situation in which an initially low quality domestic firm will jump up the quality ladder in anticipation of the optimal trade policy. We then contrast our findings with related results concerning quality reversal in the relevant trade literature.
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- Herguera, Inigo & Kujal, Praveen & Petrakis, Emmanuel, 2002. "Tariffs, quality reversals and exit in vertically differentiated industries," Journal of International Economics, Elsevier, vol. 58(2), pages 467-492, December.
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- Moraga-Gonzalez, Jose Luis & Viaene, Jean-Marie, 2005. "Trade policy and quality leadership in transition economies," European Economic Review, Elsevier, vol. 49(2), pages 359-385, February.
- David Greenaway & Robert Hine & Chris Milner, 1994. "Country-specific factors and the pattern of horizontal and vertical intra-industry trade in the UK," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 130(1), pages 77-100, March.
- Dongsheng Zhou & Barbara J. Spencer & Ilan Vertinsky, 2000.
"Strategic Trade Policy with Endogenous Choice of Quality and Asymmetric Costs,"
NBER Working Papers
7536, National Bureau of Economic Research, Inc.
- Zhou, Dongsheng & Spencer, Barbara J. & Vertinsky, Ilan, 2002. "Strategic trade policy with endogenous choice of quality and asymmetric costs," Journal of International Economics, Elsevier, vol. 56(1), pages 205-232, January.
- Carmichael, Calum M., 1987. "The control of export credit subsidies and its welfare consequences," Journal of International Economics, Elsevier, vol. 23(1-2), pages 1-19, August.
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