We examine an export game where two firms (home and foreign), located in two different countries, produce vertically differentiated products. The foreign firm is the most efficient in terms of R&D costs of quality development and the foreign country is relatively larger and endowed with a relatively higher income. The unique (risk-dominant) Nash equilibrium involves intra-industry trade where the foreign producer manufactures a good of higher quality than the domestic firm. This equilibrium is characterized by unilateral dumping by the foreign firm into the domestic economy. Two instruments of anti-dumping (AD) policy are examined, namely, a price undertaking (PU) and an anti-dumping duty. We show that, when firms' cost asymmetries are low and countries differ substantially in size, a PU leads to a quality reversal in the international market, which gives a rationale for the domestic government to enact AD law. We also establish an equivalence result between the effects of an AD duty and a PU.

anti-dumping duty, intra-industry trade, price undertaking, product quality, quality reversals
Models of Trade with Imperfect Competition and Scale Economies (jel F12), Commercial Policy; Protection; Promotion; Trade Negotiations; International Organizations (jel F13)
hdl.handle.net/1765/6610
Tinbergen Institute Discussion Paper Series
Tinbergen Institute

Moraga-Gonzalez, J.L, & Viaene, J.M.A. (2004). Anti-dumping, Intra-industry Trade and Quality Reversals (No. TI 04-124/2). Tinbergen Institute Discussion Paper Series. Retrieved from http://hdl.handle.net/1765/6610