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Product Quality and Strategic Asymmetry in International Trade

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Abstract

In a duopoly trade model with both horizontal and vertical product differentiation, we examine the endogenous choice of quantities and prices as strategic variables. We show that strategic asymmetry (such that a potential exporter commits to a quantity contract, while a local rival commits to a price contract) can be an equilibrium outcome when the relative product quality of the foreign variety is sufficiently high and trade costs are sufficiently low. A lower degree of horizontal product differentiation can make strategic asymmetry more likely. By endogenizing the quality choice, we also establish the conditions under which product quality choice gives rise to strategic asymmetry.

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  • John Gilbert & Onur A. Koska & Reza Oladi, 2020. "Product Quality and Strategic Asymmetry in International Trade," Working Papers in Economics 20/05, University of Canterbury, Department of Economics and Finance.
    • Handle: RePEc:cbt:econwp:20/05
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    Cited by:

    1. John Gilbert & Onur A. Koska & Reza Oladi, 2020. "International Trade, Upstream Market Power, and Endogenous Mode of Downstream Competition," Working Papers in Economics 20/22, University of Canterbury, Department of Economics and Finance.

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    More about this item

    Keywords

    International trade; product quality; horizontal product differentiation; Cournot- Bertrand-Nash equilibrium;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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