INCOME DISTRIBUTION, SPILLOVER EFFECTS AND CHOICE OF PRODUCT QUALITY

We consider an MNC that is originated from a developed country where income is more or less evenly distributed and serves there a high quality product with the help of sophisticated technology of production. Under liberalized policy this MNC enters into a developing economy where income distribution is highly unequal. Due to prior experience of production it possesses a cost advantage in producing appropriate product quality in the developing country described by the spillover effect. It is shown that this discriminating monopolist serves a lower quality product in the developing country without any cost advantage. This happens due to its uneven income distribution. As spillover effect starts to rise, the product qualities between the countries differentiate more. At the same time profit of MNC rises. This may provide an explanation why MNCs are so eager to enter into a developing country. The developing country also gains in terms of welfare.