Enfoque basado en el contenido

This section studies the welfare implications of establishing a quality reputation. In view of the analysis in Secion 3, establishing a quality reputation does not always provide the largest benefits for firms; on the contrary, firms, in some situations, may be better off by choosing the choice of a low-quality product. Is the choice of a high-quality product always the best choice for the country of export?

Basically, the welfare measure used is aggregate consumer surplus plus firm profits; nevertheless, the former is not taken into consideration in this analysis because this study focuses on the behaviour of home firms in foreign markets. Neither home consumer surplus nor foreign consumer surplus affects the welfare in the home country. In accordance with the assumptions of a model, the ex- pected welfare of establishing a quality reputation in the home country can be defined as:

W_He = ˜Π +δθΠH

Where Π = Pn

i=1π

i_{. In spite of the fact that a high-quality product is provided}

to foreign consumers who lack information about their own valuation, it is not necessary that all foreign consumers will give a high valuation to a high-quality product. Only consumers whose tastes match to a product will purchase a high- quality product with a high price in the next transactions.

the expected welfare of exporting a low-quality product in the home country can be shown as:

W_Le = ΠL+δΠL

When home firms offer and provide a low-quality product to foreign consumers, theses consumers will update nothing about their own type. Therefore, con- sumers are unwilling to pay a premium for a high-quality product while home firms are unwilling to lower the price of a high-quality product. The future transactions will only occur in a low-quality product only.

Due to ˜Π< πL <ΠH andθ ≤1, the home country will gain from positioning

its exported product as high quality if, and only if, the following condition holds:

θ≥ " (1 +δ)ΠL−Π˜ δΠH # (8)

This indicates that if a fraction of consumers, whose tastes match to a product, is large enough, establishing the quality reputation of an exported product will lead to a welfare improvement. Otherwise, it will cause a welfare reduction.

Now let consider the case that consumers in foreign markets know their own valuation for the quality of a product. The expected welfare of quality upgrading in the home country is equal to:

If home country choose to export a low-quality product, the expected welfare in the home country is:

W_Le = (1−θ)ΠL+δ(1−θ)ΠL

Accordingly, the quality upgrading of an export product will improve the home country’s welfare only if:

θ ≥ ΠL ΠH + ΠL (9)

These results suggest that establishing the quality reputation of a new home product in foreign markets may improve or reduce the welfare in the home country depending on a parameter θ. In other word, with a large fraction of

consumers whose tastes match to a new product, establishing a reputation in foreign markets by offering and delivering a high-quality product will improve the home country’s welfare. Similarly, upgrading the quality of an existing product will lead to a welfare gain when a fraction θ is large.

The parameter θ may be interpreted as a proportion of high-income con-

sumers. Consumers may satisfy and prefer a high-quality product to a low- quality product but a high-quality product may be unaffordable for low-income consumers. No one rejects that German cars are one of the best automobiles in the world; however, being the best quality automobiles does not means that they are suitable for all consumers. For example, some consumers choose Japanese

rean cars since they cannot afford to buy the best quality cars with every high price. Therefore, if target markets are satisfied with a standard-quality product with moderate price, why firms will need to offer a high-quality product with high production cost to such markets.

The production of a high-quality product is often considered as a pre-condition for export success and, ultimately, for economic development. Hence, establish- ing the quality reputation of a new product by upgrading the quality of an export product seems to be a desirable outcome for the exporting countries. Neverthe- less, it is found that it may cause a reduction in the welfare in exporting countries if the parameter θ is small.

6

Conclusion

This paper develops a finite two-stage game model where consumers lack in- formation about their own valuation for the quality of a new product to study firms’ quality choices. With the presence of asymmetric information, the need to establish a quality reputation may not be sufficient to induce firms to choose a high-quality product. It is found that the likelihood that a firm will choose to establish a quality reputation by upgrading the quality of an export product increases with the number of experienced consumers. However, it decreases with the number of competing firms in a concerning industry.

new markets, where none of consumers are experienced, than mixed markets and mature markets. However, if the probability that consumers will assign a high valuation to a high-quality product is sufficient large, the result will be reversed. That is, home firms are the most likely to export a high-quality product when they enter into new markets. Therefore, the larger number of experienced consumers causes home firms have more incentive to upgrade the quality of their product.

To improve a probability of a high-quality product being exported, the home government has to increase the number of experienced consumers in target for- eign markets. When the government introduces and provides a high-quality product to inexperienced consumers, these consumers become experienced con- sumers. As a result, home firms will gain more from choosing the choice of a high-quality product. Furthermore, the government can support home firms to establish the quality reputation of an exported product by subsidising firms directly, but it has to be specific to products with high quality only.

Since the likelihood of establishing a quality reputation decreases with the number of competing firms in the case of new markets; the government then has to limit the number of competing firms to improve the expected payoff from choosing high quality. However, when the quality reputation of a product is established in target foreign markets and foreign consumers possess information about their own valuation, the government should remove all entry restrictions because, in mature markets, competition is sufficient to promote the transition

to the viable high-quality export markets.

However, these results may be changed if the model is extended to be longer or infinite since consumers in new markets have opportunities to learn about their true type after being deluded. With a long time horizon, home firms may have either more or less incentive to export a high-quality product depending on many factors. On the one hand, given the large discount factor, home firms may be more likely to choose the choice of a high-quality product for establishing the quality reputation of a product and themselves when start entering new foreign markets because of the larger expected gains from doing that. On the other hand, home firms may be more likely to milk their reputation to earn short-run gains if consumers in markets are fast learning or they frequently update their belief about the quality reputation of a product.

Finally, the welfare implications of establishing a quality reputation is ex- amined. It is found that the welfare of exporting a high-quality product in the home country may be improved or reduced depending on a fraction of consumers whose tastes are a good match with a home product, θ. The choice of a high-

quality product will lead to a welfare gains if, and only if, the parameter θ is