To enter or not to enter? A competitive analysis with minimum quality standards

Abstract

This paper focuses on the influences of minimum quality standards (MQS) on entry decisions for two firms located in different countries. More precisely, when each firm sells its product only in its domestic market, there is no restriction on its product’s quality. However, when choosing to enter its foreign market, the quality is required to be no less than a specified MQS. A multi-stage game is established to examine the effects of such MQS on firms’ strategic choices of entry into their respective foreign markets. It shows that strategic choices cause the emergence of heterogeneous equilibria in which both firms make different entry decisions and thus produce products with distinct qualities provided that the MQS lies in an intermediate range. If the MQS is relatively low, both firms are willing to enter their respective foreign markets so that they coexist in each market. A relatively high MQS induces each firm to stay only in its domestic market. Furthermore, firms never have more incentive to open a new foreign market compared to the socially efficient configuration. Compared to strong competition, weak competition causes that the equilibrium behavior privately by firms is too far from the allocation that is efficient for society.