Quantity restrictions and endogenous quality choice

Abstract

In a vertical product differentiation model under Cournot competition both foreign and domestic firms respond by lowering their investment in long-run quality for a quantity restriction at, and in the neighborhood of, the free trade import level. Average quality increases only when the low-quality foreign firm faces a substantially restrictive quota / voluntary export restraint. The change in quality depends on whether the foreign firm is of high or low quality and upon the restrictiveness of the quota. The imposition of quantity restrictions has important strategic effects on the long-run choice of quality.

Green Consumption and Relative Preferences in a Vertically Differentiated International Oligopoly

“…For instance, Motta and Thisse (1993) extend the vertical di¤erentiation model to two countries with two …rms each in order to analyse the e¤ects of environmental quality standards in autarky and free trade. Herguera et al (2000) study the e¤ect of quantity restrictions on the quality choice in a vertically di¤erentiated model. At the best of our knowledge, we are the …rst to use relative preferences, along a quality dimension, to capture the social content of green consumption in an open economy version of the vertical di¤erentiated duopoly.…”

Tariffs, quality reversals and exit in vertically differentiated industries

“…11 In a similar model and in response to a quantity restriction, quality downgrading is also shown (Herguera et al, 2000). 12 This is a home market model as in Dixit (1988) and Collie (1991 domestic welfare when the foreign firm produces the high (low) quality good and the domestic firm the low (high) quality good.…”

Regulatory Standards Can Lead to Predation

“…Quality reversals in a vertical product differentiation framework have been previously addressed by Herguera/Kujal/Petrakis (1995, 2001), Motta/Thisse/Cabrales (1997), and Herguera/Lutz (1996, 2002. …”