In many markets, governments set minimum quality standards while some sellers compete on the basis of quality by exceeding them. Such quality leadership strategies often win public acclaim, especially when they involve environmental attributes. Using a duopoly model of vertical product di¡erentiation, we show that if the high-quality ¢rm can commit to a quality level before regulations are promulgated, it induces the regulator to weaken standards, and welfare falls. Our results raise doubts about the social bene¢ts of corporate self-regulation, and highlight the dangers of lengthy delays between legislative mandates for new regulations and their implementation.
The paper studies duopolistic competition when firms face fixed quality‐dependent costs of production and one of the two firms targets (at least in the long run) welfare maximization. We show that mixed oligopoly is in general socially desirable compared with a private duopoly regardless of the type of competition in the short run and the equilibrium quality ranking. In addition, the nationalization of one of the firms seems to be a more efficient regulatory instrument than the adoption of minimum quality standard or subsidization of the high‐quality provider.
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In a model of vertical product differentiation, duopolistic firms face qualitydependent costs and compete in quality and price in two segmented markets. Minimum quality standards, set uniformly or according to the principle of Mutual Recognition, can be used to increase welfare. The analysis includes entry deterrence by the choice of a particular standard. With identical costs, both industries remain in the market under either re g u l a t o r y altern a t i v e . Mutual Recognition is the optimal policy choice for either region. With significantly different costs, the Full-Harmonization outcome includes only one firm and leads to a maximal sum of regional welfares. (JEL Classifications: F12, F21, L13)
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