ASYMMETRIC INTERNATIONAL MINIMUM QUALITY STANDARDS AND VERTICAL DIFFERENTIATION

The paper develops a two country model of a vertically differentiated duopoly that spans two countries which are not integrated without additional costs. Equilibrium qualities, prices, profits, and consumer's surplus are compared when: 1. minimum quality standards are identical, and 2. standards differ across countries. Both markets turn out to be connected by the quality choices of the two firms. Both firms' prices in the two countries and their profits are lower, whereas consumer's surplus and the two offered qualities are higher in both countries if no firm is forced out of the country's market with the more demanding minimum quality standard.