Strategic Trade Policy with Endogenous Choice of Quality and Asymmetric Costs
48 Pages Posted: 18 Apr 2000 Last revised: 6 Aug 2022
Date Written: February 2000
Abstract
This paper examines the strategic trade policy incentives for investment policies towards quality improvements in a vertically differentiated exporting industry. Firms first compete in qualities and then export to a third country market based on Bertrand or Cournot competition. Optimal policies are asymmetric across the two producing countries. Under Bertrand competition, the low-quality country subsidizes investment to raise export quality, while the high-quality country imposes a tax so as to reduce the quality of its already high quality exports. Under Cournot competition, the results are reversed with a tax in the low-quality country and a subsidy in the high-quality country.
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