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Minimum Quality Standards and Equilibrium Selection with Asymmetric Firms

Author

Listed:
  • Olivier Bonroy

    (CRÉA, Laval University)

  • Christos Constantatos

    (University of Macedonia)

Abstract

In a vertically differentiated market with cost asymmetries, the risk dominance criterion selects the equilibrium where the high quality is produced by the efficient firm. We show that a sufficiently high Minimum Quality Standard reverses equilibrium selection. Hence, MQS may be used in order to increase a domestic firm's profit at the expense of a more efficient foreign rival. This produces higher domestic and lower world welfare. Since the protectionist impact of MQS comes through equilibrium targeting rather than directly affecting equilibrium outcomes, it cannot be easily detected.

Suggested Citation

  • Olivier Bonroy & Christos Constantatos, 2005. "Minimum Quality Standards and Equilibrium Selection with Asymmetric Firms," Industrial Organization 0506009, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpio:0506009
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    References listed on IDEAS

    as
    1. John C. Harsanyi & Reinhard Selten, 1988. "A General Theory of Equilibrium Selection in Games," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262582384, May.
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    3. Scarpa, Carlo, 1998. "Minimum quality standards with more than two firms1," International Journal of Industrial Organization, Elsevier, vol. 16(5), pages 665-676, September.
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    5. Carlsson, Hans & van Damme, Eric, 1993. "Global Games and Equilibrium Selection," Econometrica, Econometric Society, vol. 61(5), pages 989-1018, September.
    6. Van Huyck, John B & Battalio, Raymond C & Beil, Richard O, 1990. "Tacit Coordination Games, Strategic Uncertainty, and Coordination Failure," American Economic Review, American Economic Association, vol. 80(1), pages 234-248, March.
    7. 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.
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    13. Cabrales, Antonio & Garcia-Fontes, Walter & Motta, Massimo, 2000. "Risk dominance selects the leader: An experimental analysis," International Journal of Industrial Organization, Elsevier, vol. 18(1), pages 137-162, January.
    14. Nicolas Boccard & Xavier Wauthy, 2005. "Enforcing Domestic Quality Dominance through Quotas," Review of International Economics, Wiley Blackwell, vol. 13(2), pages 250-261, May.
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    Cited by:

    1. Mario Pezzino, 2010. "Minimum Quality Standards with More Than Two Firms Under Cournot Competition," The IUP Journal of Managerial Economics, IUP Publications, vol. 0(3), pages 26-45, August.

    More about this item

    Keywords

    Vertical product differentiation; Minimum quality standards; Equilibrium selection; Protectionism;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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