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Strategic trade policy with endogenous choice of quality and asymmetric costs |
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| Authors: | Dongsheng ZhouBarbara J. Spencer Ilan Vertinsky |
| Affiliation: | a City University of Hong Kong, Faculty of Business, 83 Tat Chee Avenue, Kowloon, Hong Kong b University of British Columbia and NBER, Faculty of Commerce, Vancouver B.C., V6T 1Z2, Canada c University of British Columbia, FEPA, Forest Science Centre, Vancouver B.C., V6T 1Z4, Canada |
| Abstract: | This paper examines strategic trade and joint welfare maximizing incentives towards investment in the quality of exports by an LDC and a developed country. Firms first compete in qualities and then export to an imperfectly competitive, third country market. Under Bertrand competition, unilateral policy involves an investment subsidy by the low-quality LDC and an investment tax by the developed country, whereas jointly optimal policy calls for the reverse so as to reduce price competition by increasing product differentiation. Under Cournot competition, unilateral policy is also reversed from the Bertrand outcome, but jointly optimal policy involves a tax in both countries. |
| Keywords: | Investment in quality Strategic trade policy R& D subsidies, vertical product differentiation |
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