Abstract

We examine an export game where two firms (home and foreign), located in two different

countries, produce vertically differentiated products. The foreign firm is the most efficient

in terms of R&D costs of quality development and the foreign country is relatively larger and

endowed with a relatively higher income. The unique (risk-dominant) Nash equilibrium involves

intra-industry trade where the foreign producer manufactures a good of higher quality than

the domestic firm. This equilibrium is characterized by unilateral dumping by the foreign

firm into the domestic economy. Two instruments of anti-dumping (AD) policy are examined,

namely, a price undertaking (PU) and an anti-dumping duty. We show that, when firms’ cost

asymmetries are low and countries differ substantially in size, a PU leads to a quality reversal

in the international market, which gives a rationale for the domestic government to enact AD

law. We also establish an equivalence result between the effects of an AD duty and a PU.