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International trade, minimum quality standards and the prisoners' dilemma

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  • Petropoulou, Dimitra

Abstract

Unilateral minimum quality standards are endogenously determined as the outcome of a non-cooperative standard-setting game between the governments of two countries. Cross-country externalities from the implementation of minimum quality standards are shown to give rise to a Prisoners' Dilemma structure in the incentives of policy-makers leading to inefficient policy outcomes. The role of minimum quality standards as non-tariff barriers is examined and the scope for mutual gains from reciprocal adjustment in minimum standards analysed. The analysis delivers four results. First, there exist four unregulated Nash equilibria in minimum standards, two symmetric and two asymmetric, depending on the quality ranking of firms in each market. The analysis establishes that in all four cases, unilaterally selected minimum quality standards are inefficient as a result of cross-country externalities. Second, minimum quality standards are shown to operate as non-tariff barriers to trade. Third, the world welfare maximising symmetric standard can be reached through reciprocal adjustments in national minimum standards from either of the two symmetric Nash equilibria. Finally, the scope for mutually beneficial cooperation is shown to be significantly restricted when cross-country externalities are asymmetric. Asymmetric externalities make a cooperative agreement at the world optimum infeasible.

Suggested Citation

  • Petropoulou, Dimitra, 2008. "International trade, minimum quality standards and the prisoners' dilemma," LSE Research Online Documents on Economics 19626, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:19626
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    More about this item

    Keywords

    standards; quality; international trade; standard coordination;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • F19 - International Economics - - Trade - - - Other
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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