International Competition In Vertically Differentiated Markets With Innovation And Imitation: Trade Policy Versus Free Trade

The important characteristic of international competition between developed and less developed countries is vertical product differentiation, where firms' quality choices represent strategic decisions. Unlike the previous literature, the authors allow for a leadership in quality choice and the possibility of imitation and learning by the domestic firm. They compare both positive and normative aspects of this setup in the free trade and the strategic trade policy regime and show that the value of leadership may change dramatically when moving from free trade to trade policy.