Trade policies, time consistency, quality reversals and exit in vertically integrated industries

Iñigo Herguera
Authors registered in the RePEc Author Service: Emmanuel Petrakis and Praveen Kujal

UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de Economía

Abstract: The impact of strategic trade policies, such as import tariffs and domestic output subsidies, is studied in a vertically differentiated duopoly. Firms first choose quality and then compete in quantities or prices in the home market. If the government is unable to commit to a policy the domestic firm then chooses its quality strategically in order to alter the market structure in its favor. Time consistent subsidies are always positive and result in a domestic monopoly as the foreign firm exits the market. Time consistent tariffs are also positive and ensure that the domestic firm always produces the high quality good. Commitment to a subsidy results in greater domestic welfare than under non-commital. Except for the case when, under price competition and the domestic firm producing the low quality good under free trade, non-commital under tariffs by the domestic government is welfare improving.

Keywords: Vertical; differentiation; Time; consistent; policies; Commitment; Import; tariffs; Output; subsidies; Quality; reversals; Exit (search for similar items in EconPapers)
Date: 2000-05
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Persistent link: https://EconPapers.repec.org/RePEc:cte:werepe:7223

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