The Role of Export Subsidies When Product Quality is Unknown
We explore in this paper the role of export subsidies when goods arriving from foreign countries are initially of unknown quality to domestic consumers, who learn about their quality only through consumption. If, when confronted with such goods, consumers view price as a signal of quality, a role for export subsidies can arise. In particular, we show that absent export subsidies, entry of high quality firms may be blocked by their inability to sell at prices reflecting their true quality. Export subsidies enable high quality producers to begin exporting profitably even while unable to credibly convey their high quality to consumers in the "introductory" period. Thus, in breaking the entry barrier for high quality firms, export subsidies can raise average quality in the market and a welfare-improving role for export subsidies emerges. Moreover, even when high quality firms find it possible to signal their high quality to consumers through an introductory pricing strategy, a role for government policy can arise: the signal (low introductory price) represents a transfer of surplus from foreign producers to domestic consumers which, as we show below, can be avoided with an appropriate export tax/subsidy policy.
(This abstract was borrowed from another version of this item.)
|Date of creation:||May 1987|
|Date of revision:|
|Contact details of provider:|| Postal: Center for Mathematical Studies in Economics and Management Science, Northwestern University, 580 Jacobs Center, 2001 Sheridan Road, Evanston, IL 60208-2014|
Web page: http://www.kellogg.northwestern.edu/research/math/
More information through EDIRC
|Order Information:|| Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bruce C. Greenwald & Joseph E. Stiglitz, 1986. "Externalities in Economies with Imperfect Information and Incomplete Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 101(2), pages 229-264.
- Gene M. Grossman & Henrik Horn, 1987.
"Infant-Industry Protection Reconsidered: The Case of Informational Barriers to Entry,"
NBER Working Papers
2159, National Bureau of Economic Research, Inc.
- Gene M. Grossman & Henrik Horn, 1988. "Infant-Industry Protection Reconsidered: The Case of Informational Barriers to Entry," The Quarterly Journal of Economics, Oxford University Press, vol. 103(4), pages 767-787.
- Kihlstrom, Richard E & Riordan, Michael H, 1984. "Advertising as a Signal," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 427-50, June.
- Schmalensee, Richard., 1980.
"Product differentiation advantages of pioneering brands,"
1140-80., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Schmalensee, Richard, 1982. "Product Differentiation Advantages of Pioneering Brands," American Economic Review, American Economic Association, vol. 72(3), pages 349-65, June.
- Kreps, David M & Wilson, Robert, 1982.
Econometric Society, vol. 50(4), pages 863-94, July.
- James A. Brander & Barbara J. Spencer, 1984.
"Export Subsidies and International Market Share Rivalry,"
NBER Working Papers
1464, National Bureau of Economic Research, Inc.
- Brander, James A. & Spencer, Barbara J., 1985. "Export subsidies and international market share rivalry," Journal of International Economics, Elsevier, vol. 18(1-2), pages 83-100, February.
- Itoh, Motoshige & Kiyono, Kazuharu, 1987. "Welfare-Enhancing Export Subsidies," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 115-37, February.
- Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-54, July/Aug..
- Feenstra, Robert C., 1986. "Trade policy with several goods and market linkages," Journal of International Economics, Elsevier, vol. 20(3-4), pages 249-267, May.
- Kyle Bagwell, 1986.
"Informational Product Differentiation as a Barrier to Entry,"
711, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Bagwell, Kyle, 1990. "Informational product differentiation as a barrier to entry," International Journal of Industrial Organization, Elsevier, vol. 8(2), pages 207-223, June.
- Kyle Bagwell & Michael Riordan, 1986. "Equilibrium Price Dynamics for an Experience Good," Discussion Papers 705, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Brecher, Richard A. & Feenstra, Robert C., 1983. "International trade and capital mobility between diversified economies," Journal of International Economics, Elsevier, vol. 14(3-4), pages 321-339, May.
- Bond, Eric W & Samuelson, Larry, 1986. "Tax Holidays as Signals," American Economic Review, American Economic Association, vol. 76(4), pages 820-26, September.
When requesting a correction, please mention this item's handle: RePEc:nwu:cmsems:758. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Fran Walker)
If references are entirely missing, you can add them using this form.