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Trade policies, time consistency, quality reversals and exit in vertically integrated industries

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  • Herguera, Iñigo
  • Kujal, Praveen
  • Petrakis, Emmanuel

Abstract

The impact of strategic trade policies, such as import tariffs and domestic output subsidies, is studied in a vertically differentiated duopoly. Firms first choose quality and then compete in quantities or prices in the home market. If the government is unable to commit to a policy the domestic firm then chooses its quality strategically in order to alter the market structure in its favor. Time consistent subsidies are always positive and result in a domestic monopoly as the foreign firm exits the market. Time consistent tariffs are also positive and ensure that the domestic firm always produces the high quality good. Commitment to a subsidy results in greater domestic welfare than under non-commital. Except for the case when, under price competition and the domestic firm producing the low quality good under free trade, non-commital under tariffs by the domestic government is welfare improving.

Suggested Citation

  • Herguera, Iñigo & Kujal, Praveen & Petrakis, Emmanuel, 2000. "Trade policies, time consistency, quality reversals and exit in vertically integrated industries," UC3M Working papers. Economics 7223, Universidad Carlos III de Madrid. Departamento de Economía.
    • Handle: RePEc:cte:werepe:7223
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    References listed on IDEAS

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    1. Anis, Aslam H. & Ross, Thomas W., 1992. "Imperfect competition and pareto-improving strategic trade policy," Journal of International Economics, Elsevier, vol. 33(3-4), pages 363-371, November.
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    Keywords

    Vertical differentiation;

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