Strategic Trade Policy with Endogenous Choice of Quality and Asymmetric Costs
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.
Zhou, Dongsheng, Barbara J. Spencer and Ilan Vertinsky. "Strategic Trade Policy With Endogenous Choice Of Quality And Asymmetric Costs," Journal of International Economics, 2002, v56(1,Jan), 205-232. citation courtesy of