Quotas and Quality in an International Duopoly

This paper examines possible adjustments to a change in a binding quota in the context of an international duopoly. Consumers directly value embodied quality of goods, which is chosen simultaneously with quantity, and before quantity in a sequential model. Possible responses to a small change in a binding quota are derived. The same three types of equilibria occur in the simultaneous and sequential models. Foreign quality downgrading can occur if domestic quality falls, and is more likely starting with a low quantity of high quality imports. Domestic quality and quantity respond in opposite directions. Welfare effects are discussed.