IDEAS home Printed from https://ideas.repec.org/a/cai/recosp/reco_692_0197.html
   My bibliography  Save this article

Quality in Open Markets: The Sumo Conjecture

Author

Listed:
  • Christophe Bernard
  • Marie-Françoise Calmette
  • Maureen Kilkenny
  • Catherine Loustalan
  • Isabelle Péchoux

Abstract

The spectacular growth in China?s export volume over the past two decades has resulted in a sharp increase in the global market share of these products.?This situation has significantly affected the industrial structure of developed countries.?Facing strong competitive pressure, many sectors in the EU and the USA (e.g., textiles, toys, steel, aluminum, photovoltaic cells) have seen significant portions of their traditional production disappear.?This rapid emergence of a developing country as a major player in international trade is unprecedented, and the comparative cost advantage of China in many areas cannot be the unique explanation.?In this paper, we identify major reasons for this situation.?Using a theoretical model of industrial organization applied to international trade, we investigate the effects of the entry of a large emerging country in the global market.?The firms? strategies are the quality and quantity of the produced good in a framework of bilateral trade.?In each country, we adopt a representative firm for each industry.?We consider a sequential game framework in which the emerging country firm plays first in quality and quantity.?We show that choosing a lower quality allows the firm from the large emerging country to enter and settle in the market of the other country.?We study the conditions under which this may lead to a less diversified offer and lower quality for consumers.?The likelihood of this strategy?s success, which we call ?sumo,? increases with the size of the emerging country and decreases with the difference in willingness to pay for quality among consumers in both countries. JEL Codes: F10, F12, F14, C72, L13.

Suggested Citation

  • Christophe Bernard & Marie-Françoise Calmette & Maureen Kilkenny & Catherine Loustalan & Isabelle Péchoux, 2018. "Quality in Open Markets: The Sumo Conjecture," Revue économique, Presses de Sciences-Po, vol. 69(2), pages 197-224.
    • Handle: RePEc:cai:recosp:reco_692_0197
    as

    Download full text from publisher

    File URL: http://www.cairn.info/load_pdf.php?ID_ARTICLE=RECO_692_0197
    Download Restriction: free
    File URL: http://www.cairn.info/revue-economique-2018-2-page-197.htm
    Download Restriction: free
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Crampes, Claude & Hollander, Abraham, 1995. "Duopoly and quality standards," European Economic Review, Elsevier, vol. 39(1), pages 71-82, January.
    2. Pablo Fajgelbaum & Gene M. Grossman & Elhanan Helpman, 2011. "Income Distribution, Product Quality, and International Trade," Journal of Political Economy, University of Chicago Press, vol. 119(4), pages 721-765.
    3. Jaskold Gabszewicz, J. & Thisse, J. -F., 1979. "Price competition, quality and income disparities," Journal of Economic Theory, Elsevier, vol. 20(3), pages 340-359, June.
    4. Dani Rodrik, 2006. "What's So Special about China's Exports?," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 14(5), pages 1-19, September.
    5. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-959, December.
    6. Venables, Anthony J., 1990. "The economic integration of oligopolistic markets," European Economic Review, Elsevier, vol. 34(4), pages 753-769, June.
    7. Motta, Massimo, 1993. "Endogenous Quality Choice: Price vs. Quantity Competition," Journal of Industrial Economics, Wiley Blackwell, vol. 41(2), pages 113-131, June.
    8. Pablo D. Fajgelbaum, 2011. "Income Distribution, Product Quality and International Trade," 2011 Meeting Papers 415, Society for Economic Dynamics.
    9. Michael Kremer, 1993. "Population Growth and Technological Change: One Million B.C. to 1990," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(3), pages 681-716.
    10. Avner Shaked & John Sutton, 1982. "Relaxing Price Competition Through Product Differentiation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 49(1), pages 3-13.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bernard, Christophe & Calmette, Marie-Françoise & Kilkenny, Maureen & Loustalan, Catherine & Pechoux, Isabelle, 2014. "Quality in Open Markets: How Larger Leads to Less," TSE Working Papers 14-505, Toulouse School of Economics (TSE).
    2. Bernard, Christophe & Calmette, Marie-Françoise & Kilkenny, Maureen & Loustalan, Catherine & Pechoux, Isabelle, 2016. "A model of international trade with vertical differentiation and Stackelberg leadership," TSE Working Papers 16-708, Toulouse School of Economics (TSE).
    3. Ngo Van Long & Zhuang Miao, 2020. "Multiple‐quality Cournot oligopoly and the role of market size," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 29(4), pages 932-952, October.
    4. Onur A. Koska, 2020. "Sourcing product quality for foreign market entry," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 156(3), pages 669-702, August.
    5. Pierre M. Picard & Alessandro Tampieri, 2016. "Income Effects and Vertical Differentiation in International Trade," DEM Discussion Paper Series 16-05, Department of Economics at the University of Luxembourg.
    6. Auer, Raphael A. & Sauré, Philip, 2017. "Dynamic entry in vertically differentiated markets," Journal of Economic Theory, Elsevier, vol. 167(C), pages 177-205.
    7. Long, Ngo Van & Miao, Zhuang, 2019. "Vertically Differentiated Cournot Oligopoly : Effects of Market Expansion and Trade Liberalization on Relative Markup and Product Quality," Discussion paper series HIAS-E-91, Hitotsubashi Institute for Advanced Study, Hitotsubashi University.
    8. Stefan Lutz & Mario Pezzino, 2012. "International Strategic Choice of Minimum Quality Standards and Welfare," Journal of Common Market Studies, Wiley Blackwell, vol. 50(4), pages 594-613, July.
    9. Rabah Amir & Hend Ghazzai & Rim Lahmandi-Ayed, 2023. "On the political economy of economic integration," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 61(1), pages 61-100, July.
    10. A. Auer, Raphael & Chaney, Thomas & Sauré, Philip, 2018. "Quality pricing-to-market," Journal of International Economics, Elsevier, vol. 110(C), pages 87-102.
    11. Lutz, Stefan H., 2002. "The Effects of Quotas on Vertical Intra-Industry Trade," ZEW Discussion Papers 02-61, ZEW - Leibniz Centre for European Economic Research.
    12. Garella, Paolo G. & Lambertini, Luca, 2014. "Bidimensional vertical differentiation," International Journal of Industrial Organization, Elsevier, vol. 32(C), pages 1-10.
    13. José Moraga-González & Noemi Padrón-Fumero, 2002. "Environmental Policy in a Green Market," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 22(3), pages 419-447, July.
    14. Min Chen & Konstantinos Serfes, 2012. "Minimum quality standard regulation under imperfect quality observability," Journal of Regulatory Economics, Springer, vol. 41(2), pages 269-291, April.
    15. Dimitra Petropoulou, 2008. "International Trade, Minimum Quality Standards and the Prisoners' Dilemma," CEP Discussion Papers dp0858, Centre for Economic Performance, LSE.
    16. Bae, Sang Hoo & Sarkis, Joseph & Yoo, Chung Sik, 2011. "Greening transportation fleets: Insights from a two-stage game theoretic model," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 47(6), pages 793-807.
    17. Bo Gao & Bin Qiu, 2023. "Income distribution and unequal gains from trade," The World Economy, Wiley Blackwell, vol. 46(1), pages 236-255, January.
    18. Buehler, Benno & Schuett, Florian, 2014. "Certification and minimum quality standards when some consumers are uninformed," European Economic Review, Elsevier, vol. 70(C), pages 493-511.
    19. Cabrales, Antonio & Motta, Massimo, 1996. "Country Asymmetries, Endogenous Product Choice and the Speed of Trade Liberalization," CEPR Discussion Papers 1326, C.E.P.R. Discussion Papers.
    20. P. M. Picard & A. Tampieri, 2021. "Vertical differentiation and trade among symmetric countries," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 71(4), pages 1319-1355, June.

    More about this item

    Keywords

    international trade; industrial organization; quality; North-South competition; country size; sequential game;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cai:recosp:reco_692_0197. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Jean-Baptiste de Vathaire (email available below). General contact details of provider: https://www.cairn.info/revue-economique.htm .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.