Trade Effects of Minimum Quality Standards with and without Deterred Entry

In a model of vertical product differentiation, duopolistic firms face quality-dependent costs and compete on quality and price in two segmented markets. Minimum quality standards, set uniformly or according to the principle of mutual recognition, can be used to increase welfare. The analysis includes entry deterrence by the choice of a particular standard. With identical costs, both industries remain in the market under either regulatory alternative. Mutual recognition is the optimal policy choice for either region. With significantly different costs, the full-harmonization outcome includes only one firm and leads to a maximal sum of regional welfares.