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International Competition in Vertically Differentiated Markets with Innovation and Imitation: Trade Policy Versus Free Trade
Author(s) -
Kováč Eugen,
Žigić Krešimir
Publication year - 2014
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/ecca.12093
Subject(s) - imitation , competition (biology) , international economics , tariff , economics , free trade , quality (philosophy) , commercial policy , international trade , government (linguistics) , psychology , social psychology , ecology , biology , philosophy , linguistics , epistemology
The competition between firms from developed (DC) and less developed countries (LDC) is typically in vertically differentiated products. We consider a model of price competition between DC and LDC firms with quality choice and imitation, and study the effects of ex post tariffs. The government faces a choice between commitment to free trade and imposing a tariff. Tariffs can lead to change in the rank of qualities compared to free trade. We identify conditions under which this quality reversal takes place, and show that quality reversal is necessary for trade policy to be superior to free trade in welfare terms.