DUOPOLY AND QUALITY STANDARDS

In the absence of sunk costs, a low-quality producer benefits from a mildly restrictive quality standard whereas a high-quality producer suffers from it. Consumers' welfare increases if the firm producing the higher quality does not increase its quality significantly in response to the increase in quality by its rival. A sufficiently severe standard causes exit from the industry. When there are no sunk cost, the high-quality producer exists first.