Public quality standards and the food industry’s structure in a global economy

Abstract

We study the impact of public quality standards on industry structure in a context of international trade. We consider vertical differentiation in an international trade model based on monopolistic competition in which firms differ in terms of their productivity and must incur two fixed export costs when exporting to any given destination: a generic one (i.e., setting up a distribution system) and a destination-specific one to meet the quality standard prevailing in the importing country. Variable costs are also increasing in quality. The absolute mass of firms in any given country is decreasing in the domestic standard, but the relative mass (market share) of foreign firms is increasing in the domestic standard. Increasing public quality standards benefit highly productive foreign firms which gain from the quality-induced exit of less productive domestic and foreign firms. The increase in industry productivity following stricter public standards does not result from induced innovation as in the Porter hypothesis but from the exit of less productive firms.