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Non-credible policies and leap-frogging in a vertically differentiated industry

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Abstract

In a vertically differentiated duopoly, where firms first choose quality and then compete in quantities, it is shown that optimal time consistent subsidies and tariffs are always positive. Time consistent subsidies result in domestic monopolies as the foreign firm exits the market. Domestic welfare is greater if the government can precommitment to a subsidy. Time consistent tariffs ensure that the domestic firm always produces the high quality good. Optimal tariffs are always higher under precommitment. Contrary to subsidies, under tariffs non-commital on the part of the domestic government is welfare improving, and domestic welfare is always greater than under both free trade and subsidies.

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  • Herguera, Iñigo, 1997. "Non-credible policies and leap-frogging in a vertically differentiated industry," UC3M Working papers. Economics 6067, Universidad Carlos III de Madrid. Departamento de Economía.
    • Handle: RePEc:cte:werepe:6067
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