MINIMUM QUALITY STANDARDS, ENTRY, AND THE TIMING OF THE QUALITY DECISION

This paper examines the effects of the imposition of minimum quality s tandards (MQS) on a vertically differentiated natural duopoly with fre e entry. It is shown that the welfare effects of MQS are crucially dep endent upon the timing of the quality choice with respect to the decis ion to enter the market. If irreversible decision to enter is taken wi thout pre-commitment to a specific quality level then a welfare improv ing MQS always exists. If, however, a firm's product quality must be d ecided prior to entry then a MQS is either redundant or counterproduct ive, since it can induce a monopoly.