VERTICAL PRODUCT DIFFERENTIATION, QUALITY STANDARDS, AND INTERNATIONAL TRADE POLICY • 13 January 2000 Stefan H. Lutz * Purdue University and ZEI Abstract I study the influence of minimum quality standards in a partial-equilibrium model of vertical product differentiation and trade in which duopolistic firms face quality-dependent costs and compete in quality and price in two segmented markets. Three alternative standard setting arrangements are Full Harmonization, National Treatment and Mutual Recognition. Under either alternative, standards can be found that increase welfare in both regions. The analysis integrates the choice of a particular standard setting alternative by governments into the model. Mutual Recognition emerges as one regulatory alternative that always improves welfare in both regions when compared to the case without regulation. Under certain cost conditions, both regions will prefer Mutual Recognition over all available alternatives. JEL Classifications: F12, F13, L13 Keywords: product differentiation, oligopoly, trade, quality standards • The author would like to thank Dan Kovenock, Marie Thursby, John Carlson, Sheng Hu and participants at the European Economic Association Ninth Annual Congress held in September 1994 in Maastricht for helpful comments and suggestions. The usual disclaimer applies. * Purdue University, Department of Economics, 1310 Krannert Building, West Lafayette, IN 47907-1310, USA, E. LutzS@mgmt.purdue.edu. I would like to thank Massimo Motta, participants at CEPR's European Research Workshop in International Trade held in September 1994 in Rome, Italy, and an anonymous referee for helpful comments and suggestions.