| Summary: | This thesis focuses on the economics of quality differentiation. It consists of three chapters.
The first chapter examines, under both Bertrand price and Cournot quantity competitions, the
optimal investment policies in a vertically differentiated industry. It shows that there exists
asymmetry between the optimal policies of low-quality and high-quality exporting countries
with respect to subsidizing or taxing investments in quality improvement of exports. Under
Bertrand competition it is optimal for the low-quality country to subsidize investments that
raise the quality of its exports, while the high-quality country has an incentive to tax
investments in improving the quality of its exports. Under Cournot competition, the results
are reversed.
The second chapter examines two widely used non-tariff barriers (NTBs), quotas and
minimum quality standard (MQS) requirements. It investigates the effects of these two NTBs
in a vertically differentiated industry consisting of one foreign and one domestic firm. It
shows that a quota on low-quality imports improves the home country's welfare while a quota
on high-quality imports reduces, in most cases, the home country's welfare. It also finds that
the imposition of an MQS on low-quality imports lowers the home country's welfare.
The third chapter examines the welfare consequences of offering a voluntary quality
certification program in addition to requiring products to meet some minimum quality
standard (MQS) when the quality of a product is unobservable. It considers a model of duopolistic competition in which price and qualities are decision variables. The chapter shows
that providing an option of voluntary certification at a higher quality level instead of requiring
all firms to meet and obtain certification at a particular designated level (MQS) is welfare
increasing. Furthermore, it shows that in this situation the optimal MQS will be lower than
the optimal MQS when there is only one mandated level of certification while the higher
quality level will be higher than it. === Business, Sauder School of === Graduate
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