Essays on product quality and strategic policies in open economies

by Jinji, Naoto

This thesis consists of three essays which contribute to the theory of product quality and strategic policies in open economies. The first essay examines strategic R&D policy in a quality-differentiated duopolistic industry where dornestic and foreign firms have access to the same technology. Under price competition the optimal policy is such that the dornestic governrnent taxes R&D if the domestic fim produces a higher quality product than its foreign rival and subsidizes R&D if the domestic firm produces a lower quality product. Under quantity competition, on the other hand, the optimal policy is such that the domestic government subsidizes R&D Rrith different subsidy rates for different ranges of relative quality, where a higher subsidy should be implemented if the domestic firm produces a lower quality product. The second essay demonstrates that the domestic government rnay have incent ives to use eco-labelling strategically when dornestic and foreign firms cornpete in an imperfectly competitive domestic market, while eco-labelling is primarily aimed at improving environmental quality. men the domestic firm obtains an eco-label and the foreign firm does not, the domestic government may have incentives to set strategically a higher or lower standard for eco-label than a standard which would be non-strategically chosen, depending on the relative size of quality-adjusted unit variable costs. The strategic effects rnay have the sarne sign regardless of the form of cornpetition. The third essay explores protectionist motives tO impose mandat ory labelling of biotechnology products when a foreign firm reduces unit production cost by using biotechnology and becomes the pnce leader in the market. Consumers may perceive biotechnology products as being of lower quality. Cornpetitive firms that use conventional technology may have incentives to label their products voluntarily. When voluntary labelling is My credible, the importing country may impose mandatory labelhg mainly because part of labelling costs can be shifted to the foreign dominant firm under mandatory labelling. When voluntary labeiiing is not credible, on the other hand, the importing country uses mandatory labelhg with other trade measures such as tariffs to skft profits from the foreign dominant firm to the domestic economy.