Citation:
Journal of International Economics. 2002, vol. 58, nº 2, p. 467-492
ISSN:
0022-1996
DOI:
10.1016/S0022-1996(02)00014-4
Sponsor:
The authors would like to thank Jim Markusen and the participants at the
meetings in Aix-en-Provence, The International Conference in Industrial Organization
(Carlos III), Bellatera (Barcelona), ASSET (Alicante), ETSG (Erasmus) and
seminars at Bologna and Vigo universities. The paper was written when Herguera
and Petrakis were at Carlos III. The authors would like to thank an anonymous
referee, Berthold Herrendorf, and especially the Editor, Jonathan Eaton, for
detailed comments that led to a complete rewrite of the paper. Kujal acknowledges
support from grants DGESIC [PB98/0024 and CAM 06/0058/2001. Herguera
acknowledges support from grant [PB93-236. All remaining errors are our own
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’ qualiIn 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.[+][-]