Trade policy and quality leadership in transition economies

José Luis Moraga-González*, Jean Marie Viaene

*Corresponding author for this work

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

Trade policy and quality leadership in transition economies are analyzed in a duopoly model of trade and vertical product differentiation. We first show that the incidence of trade liberalization is sensitive to whether firms in transition economies are producers of low or high quality. Second, we find that neither free trade nor the absence of a domestic subsidy are optimal: Both a tariff and a subsidy increase price competition and while the former extracts foreign rents the latter results in quality upgrading. Third, there exists a rationale for a government to commit to a socially optimal policy to induce quality leadership by the domestic firm when cost asymmetries are low. Finally, we establish an equivalence result between the effects of long-run exchange rate changes and those of trade policy on price competition (but not on social welfare).

Original languageEnglish
Pages (from-to)359-385
Number of pages27
JournalEuropean Economic Review
Volume49
Issue number2
DOIs
Publication statusPublished - Feb 2005

Keywords

  • Exchange rate
  • Optimal trade policy
  • Product quality
  • Quality reversal
  • Trade liberalization

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