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Vertical Product Differentiation, Minimum Quality Standards and International Trade

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  • Dimitra Petropoulou

Abstract

This paper extends a well-established vertical product differentiation model to an international duopoly with two segmented countries, where firms compete in quality and price. The framework is used to analyse governments` incentives for unilateral minimum standard-setting as well as the scope and effects of cooperative agreements in minimum standards. Endogenous national standards result from a standard-setting game between governments whose objective function is to maximise national welfare. Cross-country externalities can be are either positive or negative, depending on the quality of traded goods. Four unregulated Nash equilibria in minimum standards are shown to exist, two symmetric and two asymmetric, which correspond to the four different combinations of externalities that may arise between the two countries: symmetric positive externalities, symmetric negative externalities, or asymmetric positive and negative externalities. Unilateral minimum standards can be inefficiently high or low relative to world optimum symmetric standards and operate as non-tariff barriers to trade. Harmonisation of minimum quality standards through cooperation is both feasible and mutually beneficial in the symmetric case, but the scope for mutually beneficial cooperation is significantly restricted when countries are asymmetric and lump-sum transfers are not possible. The resulting cooperative standards are asymmetric and do not maximise world welfare.

Suggested Citation

  • Dimitra Petropoulou, 2007. "Vertical Product Differentiation, Minimum Quality Standards and International Trade," Economics Series Working Papers 352, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:352
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    Cited by:

    1. Baumann, Florian, 2015. "Freier Warenverkehr und unverfälschter Wettbewerb in der Europäischen Union: Der Beitrag der europäischen Produkthaftung," DICE Ordnungspolitische Perspektiven 75, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    2. Ourania Karakosta, 2018. "Tax Competition in Vertically Differentiated Markets with Environmentally Conscious Consumers," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 69(4), pages 693-711, April.
    3. Birg, Laura & Voßwinkel, Jan S., 2015. "Minimum quality standards and exports," Center for European, Governance and Economic Development Research Discussion Papers 248, University of Goettingen, Department of Economics.
    4. Birg, Laura & Voßwinkel, Jan S., 2015. "Minimum quality standards and non-compliance," Center for European, Governance and Economic Development Research Discussion Papers 228, University of Goettingen, Department of Economics.
    5. Jianyu Yu & Zohra Bouamra-Mechemache & Angelo Zago, 2018. "What is in a Name? Information, Heterogeneity, and Quality in a Theory of Nested Names," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 100(1), pages 286-310.
    6. Katia Berti & Rod Falvey, 2018. "Does trade weaken product standards?," Review of International Economics, Wiley Blackwell, vol. 26(4), pages 852-868, September.

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    More about this item

    Keywords

    Vertical Product Differentiation; Quality Reversal; International Trade; Minimum Quality Standards;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods

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