Trade Effects of Minimum Quality Standards with and without Deterred Entry

Abstract

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) <Key Wo rd s : p r oduct diff e r entiation, oligopoly, trade, quality standards, entry.>

Pre-emption, Predation, and Minimum Quality Standards

“…See also, for example, Siebert (2003). 10 See also Lutz (2000), Lutz et al (2000), and Lutz and Baliamoune-Lutz (2003). Related research on the effects of minimum quality standards has been forwarded, for example, by Das and Donnenfeld (1989), Boom (1995), Crampes and Hollander (1995), Ecchia and Lambertini (1997), Constantatos and Perrakis (1998), Scarpa (1998), Valletti (2000, Jinji and Toshimitsu (2004), Hansen and Nielsen (2006).…”

Strategic Entry Deterrence by Limiting Qualities under Minimum Quality Standards

“…In the published literature, however, the incentive of entry deterrence in a quality‐regulated market has received considerably less attention. Lutz () considers the trade effect of MQS on entry deterrence in an international strategic choice game. Lambertini and Scarpa () show that predatory behaviour occurs with MQS regulation and, as a result of predation, only one firm remains in the market.…”

Mutual Recognition versus National Treatment of Standards in a Classical Monopoly or Oligopoly

“…A rise in the minimum quality causes both …rms to raise quality and lower prices per unit quality (Ronnen (1991)). However, when there are two national regulators, the tendency is to raise the standard too high, shifting pro…t from the foreign …rm to local consumers (who bene…t from lower 21 Das and Donnenfeld (1989), Crampes and Hollander (1995), Lutz (1996 and2000), Lutz and Baliamoune-Lutz (2003) and Boom (1995) have applied the ShakedSutton model to international standard-setting, as do more recent studies by Jinji and Toshimitsu (2004) and Toshimitsu and Jinji (2008). There are too many examples of studies on standard-setting in the single-country Shaked-Sutton case to list here.…”