Tariffs, Quality Choice, and Cost Functions : A Foreign Monopoly Case

It has been shown that trade restrictions such as tariffs, import quotas, and voluntary export restrictions, lead to quality upgrading of imports. In this paper, however, we reconsider this proposition by focusing on the nature of cost functions. Based on a standard vertical differentiation model, we analyze the effects of tariffs on quality and quantity of imports. We show that if a fixed cost is an increasing function of quality, tariffs lead to quality downgrading of imports. Moreover, we discuss minimum quality requirements (MQR) for such a trade policy. We show that MQR increases the amount of imports and an importing country's welfare in the presence of the fixed cost function. These issues will be addressed in the context of a foreign monopoly