DP1385 Does Mutual Recognition of National Minimum Quality Standards Support Regional Convergence?

Author(s): Stefan Lutz
Publication Date: May 1996
Keyword(s): Oligopoly, Product Differentiation, Quality Standards, Regional Convergence, Trade
JEL(s): F12, F13, L13
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1385

In a model of vertical product differentiation, duopolistic firms face quality-dependent costs and compete on quality and price in two segmented markets. Minimum quality standards, set according to the principle of Mutual Recognition, can be used to increase welfare. The results of the one-shot game suggest that standards achieve initial convergence in terms of qualities produced and national welfares. Therefore, the static game is repeated in multiple periods and firms? qualities in the previous period determine their costs. In an N-period game, quality standards will, in fact, lead to convergence in terms of qualities and national welfares.