Regulatory Standards Can Lead to Predation

University of Manchester Economic Studies Discussion Paper No. 0509

14 Pages Posted: 9 Aug 2005

See all articles by Stefan Lutz

Stefan Lutz

Lutz-Econ; HMKW University

Date Written: June 3, 2005

Abstract

I present a model of vertical product differentiation and exit where a domestic and a foreign firm face fixed setup costs and quality-dependent costs of production and compete in quality and price in the domestic market. Quality-dependent costs are quadratic in qualities, but independent of the quantities produced. The domestic government may impose a minimum quality standard binding for both foreign and domestic firms. In the presence of an initial cost advantage of the domestic firm, a sufficiently high minimum quality standard set by the domestic government will enable the domestic firm to induce exit of the foreign firm, i.e. to engage in predation. However, the same standard would lead to predation by the foreign firm, if the foreign firm had the initial cost advantage!

Keywords: Vertical product differentiation, oligopoly, trade, quality, country asymmetries

JEL Classification: F12, F13, L13

Suggested Citation

Lutz, Stefan and Lutz, Stefan, Regulatory Standards Can Lead to Predation (June 3, 2005). University of Manchester Economic Studies Discussion Paper No. 0509, Available at SSRN: https://ssrn.com/abstract=771324 or http://dx.doi.org/10.2139/ssrn.771324

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Lutz-Econ ( email )

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