Quality in Open Markets: The Sumo Conjecture

• Departmental Seminar

Date and Location

Tuesday, May 12, 2015, 2:10 PM - 3:30 PM
3001 Plant and Environmental Sciences

Abstract

How can trade expansion lead to lower quality and less diversity? Autarky quality is hypothetically positively related to domestic market size and willingness to pay for quality, and inversely related to the cost of quality. To investigate open market outcomes we formalize strategically interacting firms. We identify when low-quality producers can lead and drive high-quality producers out of the market, despite the existence of customers willing to pay for quality. The strategy is more likely when the emerging exporter is very large but the difference in willingness to pay for higher quality between it and the trade partner is small.