A model of international trade with vertical differentiation and Stackelberg leadership

This paper uses a model of international trade under duopoly to investigate under which conditions a large country’s entrance on world markets can lead to lower and less quality diversity available to consumers rather than more. In our partial model, autarky quality is proportional to the willingness to pay for quality and home market size, and inversely proportional to the cost of quality. We formalize strategically interacting firms, and identify the context in which a low-quality producer can lead, driving high-quality producers out of the market. We discuss the feasibility of this ‘predatory strategy’ by an emerging country. It is more likely in contexts where the emerging exporter is much larger and when the difference in willingness to pay for quality between countries is not too large