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| Title: | | The Effects of Quotas on Vertical Intra-Industry Trade  |
| Authors: | | Lutz, Stefan H. |
| Issue Date: | | 2002 |
| Series/Report no.: | | ZEW Discussion Papers 02-61 |
| Abstract: | | A quota on foreign competition will generally lead to quality-upgrading (downgrading) of the low-quality (high-quality) firm, an increase in average quality, a reduction of quality differentiation, and a reduction of domestic consumer surplus, irrespective of whether the foreign firm produces higher or lower quality. Effects of a quota on industry profits and domestic welfare depend crucially on the direction of international vertical differentiation. If the foreign firm produces low quality, both firms' prices and profits rise but domestic welfare falls. This describes well some major effects of a Japanese VER in the US auto market and relevant empirical findings. If the foreign firm produces high quality, foreign profits will fall. Since domestic consumer surplus falls only unsubstantially, domestic profit gains lead to an increase of domestic welfare. |
| Subjects: | | trade quotas vertical product differentiation quality-dependent costs |
| JEL: | | F12 F13 L13 |
| Document Type: | | Working Paper |
| Appears in Collections: | | Publikationen von Forscherinnen und Forschern des ZEW ZEW Discussion Papers
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