Environmental quality in a differentiated duopoly facing a minimum quality standard

In a differentiated duopoly where firms compete in environmental quality, we examine the effects of a minimum quality standard (MQS) on firms' quality choices, profits, the average quality offered to consumers, and social welfare. Deviating from some of the previous results, we show that in general the effects are ambiguous and depend critically on how strongly the products are substitutes, the difference in firms' unit costs of quality provision, and their market shares. In particular, we show that while at low levels the MQS has no effects on industry, at intermediate levels it can benefit the high-cost firm by forcing it to raise its quality while always causes the low-cost firm to reduce its quality and lose profits. We find that only under quite restrictive conditions does an MQS policy unambiguously increase welfare.