Quality Standards, Industry Structure, and Welfare in a Global Economy

We study the impact that mimimum quality standards have on industry structure, trade, and welfare when firms can develop their own private standard with a higher quality than the public standard. We introduce vertical differentiation in a firm-based trade model in which firms differ in terms of thei...

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Bibliographic Details
Published in:American journal of agricultural economics 2016-10, Vol.98 (5), p.1432-1449
Main Authors: Gaigné, Carl, Larue, Bruno
Format: Article
Language:English
Subjects:
Agricultural economics
Ambiguity
Companies
Differentiation
Economic models
Economics and Finance
entry/exit
Global economy
Humanities and Social Sciences
Impact analysis
Prices
private standard
product quality
Productivity
Profits
Public standard
Quality standards
Resource allocation
Welfare
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Summary:We study the impact that mimimum quality standards have on industry structure, trade, and welfare when firms can develop their own private standard with a higher quality than the public standard. We introduce vertical differentiation in a firm-based trade model in which firms differ in terms of their productivity and non-cooperatively select the quality and price of their product. A higher public standard increases prices set by constrained and unconstrained firms, but the effect on firms' output is generally ambiguous for both types of firms. The most productive firms raise their private standard and enjoy higher profits at the expense of less productive firms. A public standard can increase welfare, especially when there is a high concentration of low productivity domestic firms because of a better allocation of resources.
ISSN:0002-9092
1467-8276
DOI:10.1093/ajae/aaw039