Recent literature on competition in regulation concludes
I n t r o d u c t i o nThis paper offers an intuitive way to explore how international trade may affect standard levels through economies of scale. Imagine two countries, A and B, identical in everything but some factor endowment, so that country A obtains a higher income per capita than country B. There are no barriers to trade, apart from different minimum levels of a measurable standard that must be met in order to market a product within the boundaries of each country.Individuals are distributed on a continuum of income levels that mirrors their preferences for the standard. If individuals reveal heterogeneous and single-peaked preferences, majority rule implies that the median level becomes the legal minimum standard in each country. Once minimum standards are set, with country A characterized by a higher minimum standard than B, consumers' behavior is typical of models of horizontal differentiation. Individuals will buy the differentiated product with the lowest effective price, which is the price of the product inflated by the cost of not buying the preferred standard level.Moreover, suppose that production is characterized by increasing returns to scale, and that both countries have access to the same technology. Opening to trade implies a readjustment in market sizes. If no agreement for recognition of reciprocal regulations exists, and if the two countries have the same population, a simple comparison of market sizes suggests that B's firms cannot compete in free trade with the firm in A producing at the minimum standard. And if the extent of the gain in B's market and the sensitivity of costs to the level of production are such that the price of goods produced at A's minimum standard becomes smaller than the price of those produced at the minimum standard level of country B, then the effective price of a product with a higher standard level, for every consumer of country B, may become lower than the effective price of goods produced at B's minimum. The firm producing at B's minimum standard is left to choose between either leaving the market, or raising the standard level to gain access to the market of country A. The minimum standard in B becomes redundant, and the result is international convergence toward the top. *University of Redlands-U.S.A.
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