Import controls under imperfect information

This paper examines the effects of governmentally imposed quality controls upon an industry which consists of a domestic monopolist which is facing competition from a large number of foreign firms. Domestic consumers know the quality of the home good, while their information about the quality of imports is imperfect. Although minimum quality standards are directly imposed on imports, they indirectly affect the behavior of the domestic monopolist. The domestic firm raises quality but its price response is ambiguous. Furthermore, its market share and profitability decline. Import controls harm some consumers and benefit others. We state conditions which lead to a lower national welfare.