Quality standards, industry structure and welfare in a global economy
Résumé
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.