Welfare and quality improvement in an international market

This paper analyzes the optimal uniform and discriminatory quality requirements under Cournot competition when two firms produce high-quality and low-quality products, respectively, in an international market. The quality requirements in our paper are not set for the foreign firm but are set to regulate products of different qualities, since in the real world a domestic firm could be a high- or low-quality producer. We find that whether the government should raise the quality requirements depends on the type of competition in which firms engage and the adopted quality requirements. By and large, the government should always set quality requirements raising both firms’ quality directly or indirectly, regardless of the quality of the product of the domestic firm. However, if the domestic firm is a high-quality producer, the government should set a quality requirement that enables the domestic firm to monopolize the market when a discriminatory quality requirement is adopted, and should not set any quality requirement when a uniform quality requirement is adopted. Moreover, we show that the quality requirement can actually improve global welfare in most cases.