Import Quotas Foster Product Imitation in Vertically Differentiated Duopolies

SSRN Electronic Journal 09/2000; DOI: 10.2139/ssrn.267968


Quotas act as facilitating practices under price competition. Because they relax price competition, they may affect firms' quality choice in very specific ways. We analyze this issue by considering the following stage game: a domestic government chooses an import quota, then a domestic and a foreign firm choose the quality of their product before engaging a price competition. In equilibrium, both firms end up choosing the same quality for a wide range of quota values, when costs for quality do not rise too quickly. Moreover, the optimal policy for the government consists in choosing the quota level which is just sufficient to induce this product imitation. Once its effects on quality choice is taken into account, the quota may thus hurt the foreign firm and increase domestic welfare.

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