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Minimum Quality Standards and Equilibrium Selection with Asymmetric Firms

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Abstract

In a vertically differentiated market with cost asymmetries, the risk dominance criterion selects the equilibrium where the high quality is produced by the efficient firm. We show that a sufficiently high MinimumQuality Standard reverses equilibrium selection. Hence, MQS may be used in order to increase a domestic firm’s profit at the expense of a more efficient foreign rival. This produces higher domestic and lower world welfare. Since the protectionist impact of MQS comes through equilibrium targeting rather than directly affecting equilibrium outcomes, it cannot be easily detected.

Suggested Citation

  • Olivier Bonroy & Christos Constantatos, 2008. "Minimum Quality Standards and Equilibrium Selection with Asymmetric Firms," Discussion Paper Series 2008_13, Department of Economics, University of Macedonia, revised Oct 2008.
    • Handle: RePEc:mcd:mcddps:2008_13
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    References listed on IDEAS

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    1. John C. Harsanyi & Reinhard Selten, 1988. "A General Theory of Equilibrium Selection in Games," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262582384, April.
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    Cited by:

    1. Mario Pezzino, 2010. "Minimum Quality Standards with More Than Two Firms Under Cournot Competition," The IUP Journal of Managerial Economics, IUP Publications, vol. 0(3), pages 26-45, August.

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    More about this item

    Keywords

    Vertical product differentiation; Minimum quality standards; Equilibrium selection; Protectionism.;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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