Publication: Trade policies, time consistency, quality reversals and exit in vertically integrated industries
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Publication date
2000-05
Defense date
Advisors
Tutors
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Impact
Export
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.
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Keywords
Vertical differentiation, Time consistent policies, Commitment, Import tariffs, Output subsidies, Quality reversals, Exit