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On Tariff, Quality Choice and Innovation in a Vertically Differentiated Monopoly with Discrete Preferences

Author

Listed:
  • Rajat Acharyya

    (Jadavpur University)

  • Swapnendu Banerjee

    () (National University of Singapore)

Abstract

In a vertically differentiated monopolistic framework with discrete preferences we examine how protecting the low-quality segment raises the incentive for quality innovation. We show how the monopolist facing competitive imports, might fail to exert its complete monopoly power even if there is prohibitive tariff on both the high and low quality segment of the market. On the other hand, given non prohibitive tariff on the high quality segment, the potential gain for the monopolist exhausts at a level much below the prohibitive low-quality tariff level. Also a sufficiently low tariff on the high quality product can force the monopolist to produce the first best qualities irrespective of the tariff level on the low quality product

Suggested Citation

  • Rajat Acharyya & Swapnendu Banerjee, 2005. "On Tariff, Quality Choice and Innovation in a Vertically Differentiated Monopoly with Discrete Preferences," Departmental Working Papers wp0504, National University of Singapore, Department of Economics.
  • Handle: RePEc:nus:nusewp:wp0504
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    File URL: http://www.fas.nus.edu.sg/ecs/pub/wp/wp0504.pdf
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    References listed on IDEAS

    as
    1. Das, Satya P. & Donnenfeld, Shabtai, 1989. "Oligopolistic competition and international trade : Quantity and quality restrictions," Journal of International Economics, Elsevier, vol. 27(3-4), pages 299-318, November.
    2. Dani Rodrik, 1988. "Closing the Technology Gap: Does Trade Liberalization Really Help?," NBER Working Papers 2654, National Bureau of Economic Research, Inc.
    3. 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.
    4. Russell Cooper, 1984. "On Allocative Distortions in Problems of Self-Selection," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 568-577, Winter.
    5. Lambertini, Luca & Orsini, Raimondello, 2000. "Process and product innovation in a vertically differentiated monopoly," Economics Letters, Elsevier, vol. 68(3), pages 333-337, September.
    6. Analysis, A Welfare & Das, Satya P. & Donnenfeld, Shabtai, 1987. "Trade policy and its impact on quality of imports," Journal of International Economics, Elsevier, vol. 23(1-2), pages 77-95, August.
    7. Swapnendu Bandyopadhyay & Rajat Acharyya, 2004. "Process and Product Innovation: Complementarity in a Vertically Differentiated Monopoly with Discrete Consumer Types," The Japanese Economic Review, Japanese Economic Association, vol. 55(2), pages 175-200.
    8. Kala Krishna, 1985. "Tariffs vs. Quotas with Endogenous Quality," NBER Working Papers 1535, National Bureau of Economic Research, Inc.
    9. Aw, Bee Yan & Roberts, Mark J., 1986. "Measuring quality change in quota-constrained import markets: The Case of U.S. Footwear," Journal of International Economics, Elsevier, vol. 21(1-2), pages 45-60, August.
    10. Kamien,Morton I. & Schwartz,Nancy L., 1982. "Market Structure and Innovation," Cambridge Books, Cambridge University Press, number 9780521293853, October.
    11. Acharyya, Rajat, 1998. "Monopoly and product quality: Separating or pooling menu?," Economics Letters, Elsevier, vol. 61(2), pages 187-194, November.
    12. Segerstrom, Paul S & Anant, T C A & Dinopoulos, Elias, 1990. "A Schumpeterian Model of the Product Life Cycle," American Economic Review, American Economic Association, vol. 80(5), pages 1077-1091, December.
    13. Clemenz, Gerhard, 1990. "International R&D competition and trade policy," Journal of International Economics, Elsevier, vol. 28(1-2), pages 93-113, February.
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    More about this item

    Keywords

    Protection; Quality Innovation; Discrete Types; Monopoly;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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