Reference

Christophe Bernard, Marie-Françoise Calmette, Maureen Kilkenny, Catherine Loustalan, and Isabelle Pechoux, Quality in Open Markets: How Larger Leads to Less, TSE Working Paper, n. 14-505, June 2014.

Abstract

We show how a large country’s entrance on world markets can lead to lower and less quality diversity available to consumers rather than more. In our model, autarky quality is directly proportional to the willingness to pay for quality and home market size, and inversely proportional to the cost of quality. We formalize strategically interacting firms, and identify the context in which a low-quality producer can lead, driving high-quality producers out of the market despite the existence of customers willing to pay for higher quality. We discuss the feasibility of this ‘predatory strategy’ by an emerging country. It is more likely in contexts where the emerging exporter is much larger.