Quality wars in the North

• Published date: 01 July 2019
• Author: Yoonho Choi,Eun Kwan Choi
• Date: 01 July 2019
• DOI: http://doi.org/10.1111/twec.12795

2026

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wileyonlinelibrary.com/journal/twec World Econ. 2019;42:2026–2038.

© 2019 John Wiley & Sons Ltd

Received: 29 September 2018

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Revised: 9 March 2019

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Accepted: 11 March 2019

DOI: 10.1111/twec.12795

ORIGINAL ARTICLE

Quality wars in the North

YoonhoChoi1

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Eun KwanChoi2

1Simpson College, Indianola, Iowa

2Economics,Iowa State University, Ames, Iowa

KEYWORDS

foreign copycat firm, quality competition, vertical product differentiation

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INTRODUCTION

There is large literature on trade and quality. Murphy and Shleifer (1997, p. 1) argue that “countries

choose trading partners at a similar level of development, who produce similar quality products.”

They suggest that high- income countries tend to trade high- quality goods one another. However, the

substantial bilateral US trade deficit with China during the last three decades betrays this belief. Their

trade volume has increased to such an extent that they are now engaged in a trade war, and the ensuing

trade dispute is not likely to be resolve anytime soon.

Hallak and Schott (2011) found that for the period 1989–2003, the average quality and per capita

GDP are strongly correlated, but the quality gap between high- income and low- income countries de-

clined.1 Similarly, Khandelwal (2010) showed that more advanced countries export higher- quality

products. Likewise, Baldwin and Ito (2011) demonstrated in an empirical study of nine exporters for

the period 1997–2006 that 50%–60% of exports of large European nations were quality exports, while

about 40% of US and Japanese exports were quality goods. The share of quality goods in China's ex-

ports was in the range of 15%–25%.

Park (2001) investigated quantity and price competition in a duopoly model where a high- tech

firm and a low- tech firm compete in a third country. Verhoogen (2008) observed quality upgrading

in a study of Mexican manufacturing plants. Specifically, they maintain that Southern exporters

produce higher- quality goods for export than for the domestic market, to appeal to richer Northern

consumers.

Choi and Choi (2018) suggested that when an innovator in a developed economy exports a high-

quality product to a developing country, a copycat firm may enter, producing a low- quality product

and charging a lower price. They compared the quality of products when high- quality Northern firms

enter the Southern market and compete with local firms in a developing country.

Few papers in the literature have entertained the possibility that a foreign copycat firm in a devel-

oping country may enter the market of the developed economy. There are two stylised facts about the

competition between a developing country firm and the high- quality and low- quality firms operating

1Developing economies tend to grow faster. Thus, the quality gap between the high- income and low- income countries shrinks

over time.