Tariffs, quality reversals and exit in vertically differentiated industries |
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Authors: | Iñigo HergueraPraveen Kujal Emmanuel Petrakis |
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Institution: | a Universidad Complutense, Complutense, Spain b Universidad Carlos III de Madrid, Departamento de Economia, Calle Madrid 126-128, 28903 Getafe, Madrid, Spain c University of Crete, Crete, Greece |
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Abstract: | In a vertically differentiated industry a domestic and a foreign firm first choose the quality of their goods and then compete in quantities, or prices, in the home market. We investigate the cases in which a tariff is chosen before, or after, the firms’ quality decision. These cases are referred to as the ex-ante and the ex-post game, respectively. Optimal ex-post tariffs are positive and ensure that the domestic firm always produces the high quality good. The optimal ex-ante tariff is prohibitive and welfare under domestic monopoly is lower than under ex-post tariffs, unless firms compete in prices and the domestic firm is high quality. |
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Keywords: | Vertical differentiation Import tariffs Quality reversals Exit |
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