VOLUNTARY EXPORT RESTRAINTS, PROFITS, AND QUALITY ADJUSTMENT

This paper develops a model of vertical differentiation to assess the impact of output constraints on the profits and quality choices of firms subject to them. A competitive environment is developed with the automobile industry in mind - multiproduct oligopolists producing differentiated goods who behave as Cournot competitors. The results show that an output constraint will not induce constrained firms to upgrade their product line when their unconstrained competitors produce higher quality models. It is also shown that an output constraint can raise the profits of constrained firms despite output increases by unconstrained firms.