Minimum Quality Standards and Equilibrium Selection with Asymmetric Firms

Olivier Bonroy and Christos Constantatos

Discussion Paper Series from Department of Economics, University of Macedonia

Abstract: In a vertically differentiated market with cost asymmetries, the risk dominance criterion selects the equilibrium where the high quality is produced by the efficient firm. We show that a sufficiently high MinimumQuality Standard reverses equilibrium selection. Hence, MQS may be used in order to increase a domestic firm’s profit at the expense of a more efficient foreign rival. This produces higher domestic and lower world welfare. Since the protectionist impact of MQS comes through equilibrium targeting rather than directly affecting equilibrium outcomes, it cannot be easily detected.

Keywords: Vertical product differentiation; Minimum quality standards; Equilibrium selection; Protectionism. (search for similar items in EconPapers)
JEL-codes: F13 L13 L5 (search for similar items in EconPapers)
Date: 2008-10, Revised 2008-10
New Economics Papers: this item is included in nep-bec, nep-com and nep-mic
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Related works:
Working Paper: Minimum Quality Standards and Equilibrium Selection with Asymmetric Firms (2005)
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