Essays on quality competition

This thesis focuses on the economics of quality differentiation. It consists of three chapters. The first chapter examines, under both Bertrand price and Cournot quantity competitions, the optimal investment policies in a vertically differentiated industry. It shows that there exists asymmetry between the optimal policies of low-quality and high-quality exporting countries with respect to subsidizing or taxing investments in quality improvement of exports. Under Bertrand competition it is optimal for the low-quality country to subsidize investments that raise the quality of its exports, while the high-quality country has an incentive to tax investments in improving the quality of its exports. Under Cournot competition, the results are reversed. The second chapter examines two widely used non-tariff barriers (NTBs), quotas and minimum quality standard (MQS) requirements. It investigates the effects of these two NTBs in a vertically differentiated industry consisting of one foreign and one domestic firm. It shows that a quota on low-quality imports improves the home country's welfare while a quota on high-quality imports reduces, in most cases, the home country's welfare. It also finds that the imposition of an MQS on low-quality imports lowers the home country's welfare. The third chapter examines the welfare consequences of offering a voluntary quality certification program in addition to requiring products to meet some minimum quality standard (MQS) when the quality of a product is unobservable. It considers a model of duopolistic competition in which price and qualities are decision variables. The chapter shows that providing an option of voluntary certification at a higher quality level instead of requiring all firms to meet and obtain certification at a particular designated level (MQS) is welfare increasing. Furthermore, it shows that in this situation the optimal MQS will be lower than the optimal MQS when there is only one mandated level of certification while the higher quality level will be higher than it.Business, Sauder School ofGraduat