Quantity restrictions and endogenous quality choice |
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Authors: | Iigo Herguera Praveen Kujal Emmanuel Petrakis |
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Institution: | a Universidad Complutense de Madrid, Madrid, Spain;b Departamento de Economía, Universidad Carlos III de Madrid, Calle Madrid, 126, 28903 Getafe, Madrid, Spain;c University of Crete, Crete, Greece |
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Abstract: | In a vertical product differentiation model under Cournot competition both foreign and domestic firms respond by lowering their investment in long-run quality for a quantity restriction at, and in the neighborhood of, the free trade import level. Average quality increases only when the low-quality foreign firm faces a substantially restrictive quota/voluntary export restraint. The change in quality depends on whether the foreign firm is of high or low quality and upon the restrictiveness of the quota. The imposition of quantity restrictions has important strategic effects on the long-run choice of quality. |
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Keywords: | Vertically differentiation Quotas VERs Quality downgrading |
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