Working Paper: CEPR ID: DP1522
Authors: Inigo Herguera; Stefan Lutz
Abstract: The recent extensive study of vertical product differentiation models has allowed for the analysis of international trade issues in the presence of country asymmetries in terms of product qualities, technology, costs, market size, and income. In the presence of such asymmetries, national industries will either be market leaders or be lagging behind in the international market place in terms of their product qualities. The resulting asymmetry in profits creates powerful incentives for lagging industries as well as their national governments to reverse this situation to their advantage, i.e. to induce ?leapfrogging? in terms of product qualities. This note presents an example where a minimum quality standard facilitates leapfrogging as well as exit of the foreign firm.
Keywords: Vertical product differentiation; Oligopoly; Trade; Quality; Leapfrogging; Country asymmetries
JEL Codes: F12; F13; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Minimum quality standards (L15) | Domestic firm incentivized to leapfrog in quality (L15) |
| Domestic firm incentivized to leapfrog in quality (L15) | Domestic firm sets higher quality than foreign firm (L15) |
| Domestic firm sets higher quality than foreign firm (L15) | Foreign firm cannot achieve nonnegative profits (F23) |
| Minimum quality standards (L15) | Domestic firm monopolizes the market (L12) |
| Minimum quality standards (L15) | Foreign firm's exit from the market (F23) |
| Minimum quality standards (L15) | Domestic welfare increases (H53) |