Price equivalent tariffs and quotas under a domestic monopoly

Price-equivalent import tariffs and quotas are compared when domestic production is controlled by a monopolist, say an agricultural marketing board with the power to restrict domestic supply, under endogenous terms of trade. Welfare comparisons boil down to sourcing costs comparisons. Quotas tend to dominate at high domestic prices, ad valorem tariffs at intermediate prices and specific tariffs at low domestic prices. Welfare maxima are achieved with more restrictive policies than under perfect competition. These results rationalize separate negotiations for sensitive products in the Doha Round and the setting of tariff-rate quotas that mimic import quotas for these products. Finally, in ascertaining the robustness of our policy ranking to the choice of variable anchoring the comparisons, we found that specific tariffs unambiguously dominate ad valorem tariffs and quotas when government revenue or imports anchor the comparisons. However, some quota revenues and import levels cannot be achieved with tariffs.     

The ranking of alternative tariff and quota policies in the presence of domestic monopoly

Bhagwati demonstrated the nonequivalence between tariffs and quotas in the presence of monopoly. This paper also assumes domestic production to be monopolized and shows that giving import licenses or tariff revenues to the domestic producer may raise or lower the welfare cost of protection and the price paid by consumers from the price under other tariff and quota arrangements which maintain the same market share for the domestic producer. However, if the monopolist realizes that commercial policy is an instrument used to maximize the policymaker's welfare function, instead of being a goal in itself, the equivalence of tariffs and quotas re-emerges.     

Optimal revenue-raising trade restrictions under uncertainty

A country seeks to achieve a fixed expected revenue by restricting trade when it faces uncertainty about domestic demand for a good and about foreign supply. If the uncertainty in the demand and supply functions is multiplicative then the policy which maximises domestic expected surplus is a fixed schedule of tariffs depending only on world price. Under additive uncertainty the ranking of ad valorem tariffs and quotas depends systematically on the targeted expected revenue and the degree of uncertainty in demand and in world price but a specific tariff is superior to both these policies.     

The nonequivalence of tariffs,import quotas,and voluntary export restraints

This paper compares the equilibrium levels of prices, imports, production and consumption under a tariff, an import quota, and a voluntary export restraint when each trade restriction is set so as to lead to the same quantity of imports. Competitive, domestic production monopoly, import monopoly, and export monopoly cases are examined. Voluntary export restraints are shown to have different effects than import quotas or tariffs, especially when some potential exporters remain outside the agreements.     

A reappraisal of strategic trade policies with the endogenous mode of competition under vertical structures

This paper examines the endogenous choice of competition mode with strategic export policies in vertically related markets when each upstream firm located in each country determines the terms of the two-part tariff contract by maximizing generalized Nash bargaining. We show that (i) choosing Cournot (Bertrand) competition is the dominant strategy for both downstream firms when goods are substitutes (complements), which leads Pareto superior regardless of the nature of goods under the optimal trade policies; (ii) irrespective of rival’s competition mode, the optimal trade policy is an export subsidy under Cournot competition and an export tax under Bertrand competition; and (iii) trade liberalization may give rise to changes of competition mode and increase of social welfare.     

When and how should infant industries be protected?

This paper develops and analyzes a welfare maximizing model of infant industry protection. The domestic infant industry is competitive and experiences dynamic learning effects that are external to firms. The competitive foreign industry is mature and produces a good that is an imperfect substitute for the domestic good. A government planner can protect the infant industry using domestic production subsidies, tariffs, or quotas in order to maximize domestic welfare over time. As protection is not always optimal (although the domestic industry experiences a learning externality), the paper shows how the decision to protect the industry should depend on the industry's learning potential, the shape of the learning curve, and the degree of substitutability between domestic and foreign goods.Assuming some reasonable restrictions on the flexibility over time of the policy instruments, the paper subsequently compares the effectiveness of the different instruments. Given such restrictions, the paper shows that quotas induce higher welfare levels than tariffs. In some cases, the dominance of the quota is so pronounced that it compensates for any amount of government revenue loss related to the administration of the quota (including the case of a voluntary export restraint, where no revenue is collected). In similar cases, the quota may even be preferred to a domestic production subsidy.     

Tariff and quota equivalence in the presence of asymmetric information

This paper investigates the equivalence of optimal import tariffs and quotas in a Cournot duopoly model when firms have more information about demand than the domestic government. I consider a screening model in which the government offers the domestic firm different contracts from which to choose. I show that the availability and cost of obtaining correct information from the firm depends upon the choice of trade policy instrument. Asymmetric information thus destroys the equivalence of tariffs and quotas, which prevails under complete information, and has a profound impact on how government, firms, and consumers rank different trade policy instruments.     

Monetary policy and welfare in a small open economy

This paper analyzes optimal monetary policy in a small open economy featuring monopolistic competition and nominal rigidities. It shows that the utility-based loss function for this economy can be written as a quadratic expression of domestic inflation, output gap and real exchange rate. The presence of an internal monopolistic distortion and a terms of trade externality drives optimal policy away from domestic inflation targeting and affects the optimal level of exchange rate volatility. When domestic and foreign goods are close substitutes for each other, the optimal policy rule implies lower real exchange rate volatility than a domestic inflation targeting regime. The reverse is true when the elasticity of substitution between goods is low.     

Strategic trade policy with endogenous choice of quality and asymmetric costs

This paper examines strategic trade and joint welfare maximizing incentives towards investment in the quality of exports by an LDC and a developed country. Firms first compete in qualities and then export to an imperfectly competitive, third country market. Under Bertrand competition, unilateral policy involves an investment subsidy by the low-quality LDC and an investment tax by the developed country, whereas jointly optimal policy calls for the reverse so as to reduce price competition by increasing product differentiation. Under Cournot competition, unilateral policy is also reversed from the Bertrand outcome, but jointly optimal policy involves a tax in both countries.     

Fair trades by trade fairs: Information providing institutions under monopolistic competition

It is a standard result of search theory that the optimal reservation supply price, e.g. wage, is negatively correlated to search costs. This paper applies the inverse relationship, between demand prices and limit prices, to the analysis of an hitherto unexplored topic: trade fairs. Trade fairs bloomed during the Middle Ages and early trade-based capitalism and survived for centuries. In last decades, their growth became sustained: they attract every year hundreds of thousands of exhibitors and tens of millions of visitors.The driving forces behind the trade fair activity are increasing return to scale of search for information, under conditions of imperfect competition, particularly large group monopolistic competition. Under these circumstances, trade fairs offer their participants a collective substitute for information activities that would be beyond individual possibilities. This mechanism is of paramount importance for small firms. Where there are many small suppliers and buyers, and product differentiation, trade fairs give agents the opportunity of low-cost, high-density information exchanges, under spacetime constraints. This leads to lower search costs and lower limit prices, then fairer trades. But this mechanism also implies natural monopoly or oligopoly: the larger the trade fair, i.e. the larger the number of suppliers and visitors who participate, the less the average cost of the service. More generally, natural monopolies arising from decreasing-to-scale search costs ask for a new view of government's role either in the organization or in the regulation of information exchanges. Policy implications for small business development are stressed, including tariff regulation, public investment, and involvement of small business associations in the design and organization of trade fairs.     

R&D policies, trade and process innovation

We set up a simple trade model with two countries hosting one firm each. The firms invest in cost-reducing R&D, and each government may grant R&D subsidies to the domestic firm. We show that it is optimal for a government to provide higher R&D subsidies the lower the level of trade costs, even if the firms are independent monopolies. If firms produce imperfect substitutes, policy competition may become so fierce that only one of the firms survives. International policy harmonization eliminates policy competition and ensures a symmetric outcome. However, it is shown that harmonization is not necessarily welfare maximizing. The optimal coordinated policies may imply an asymmetric outcome with R&D subsidies to only one of the firms.     

贸易便利化、中间品进口与企业出口增加值

本文将中国工业企业数据库和中国海关贸易数据库相匹配,采用双受限Tobit模型检验了贸易便利化如何通过中间品进口提升企业出口增加值。研究发现,贸易便利化对企业出口增加值存在显著的正向促进作用,其机制主要是通过中间品进口种类增加产生的技术溢出效应、中间品进口成本下降产生的成本节约效应、上游中间品进口产生的竞争效应等实现的。进一步研究发现,贸易便利化对企业出口增加值的影响存在异质性,表现为非国有企业、一般贸易企业和资本密集型企业受到的影响更大。本文认为,应该加强基础设施建设,营造良好的制度环境,积极推进贸易便利化,扩大进口中间品种类,降低进口中间品价格,抑制上游中间品企业垄断,从而提高企业出口增加值,实现开放型经济高质量发展。     

Optimal pricing in social networks considering reference price effect

We study the optimal monopoly pricing strategies in a social network, in which consumers experience a network effect that is dependent on their neighbors' consumptions and a reference price which is the average price received by their neighbors. We establish a two-stage game model for any social network. Utilizing the backward induction, we derive the equilibrium price by maximizing the monopolist's profit. In addition, we apply this model to the two most commonly used network structures: the star network and the bipartite network. We find that both the network effect and the reference price effect play a critical role in deciding pricing strategies in social networks. Moreover, our numerical results demonstrate that whether to implement discriminatory pricing depends critically on the network structure. This work provides monopoly firms a useful guideline for optimal pricing decisions in social network marketing.     

Trade policy in a “super size me” world

When a foreign monopolist sets a single market clearing price for its product, the sign of the optimal tariff is determined by the extent of pass through (also known as the terms of trade effect). However, when a foreign monopolist employs a second degree price discrimination mechanism in the domestic market the calculus of welfare maximization is very different. While there are still terms of trade effects from the imposition of a tariff, the existence of such effects are neither necessary nor sufficient to determine the sign of the optimal tariff. Instead the distribution of valuations within the population is the key determinant of the nature of policy intervention. This result differs significantly from the uniform price case and is driven by the incentive compatibility constraint which places the distribution of types at the center of the analysis. If there is a relatively large fraction of high valuation types in the population, then domestic information rents may be increased by subsidizing imports thereby increasing the consumption of the low valuation types and moving the incentive constraint in favor of the high valuation types. However, if the share of high types in the population is relatively small then the increase in information rents will also be small but the fiscal implications of a subsidy will be large. Consequently, the optimal policy will be to impose a trade tax.     

Smuggling and price disparity

This paper proposes a model of smuggling consistent with the coexistence of smuggling, legal trade and price disparity, defined as a domestic price which exceeds (is less than) the return from legal export (import). These phenomena have been found to characterize Indonesian smuggling. A framework is presented in which legal trade is used to cloak smuggling activity with the implication that the greater the volume of legal trade, the less the costs of smuggling. This model is then used to explain the observation noted above and to show that smuggling may be welfare increasing vis-à-vis the non-smuggling situation, and that even if the suppression of smuggling is costless, tax revenue maximization may require a positive level of smuggling. In addition, the model is applied to coffee and rubber exports from Indonesia.     

Estimates and Determinants of Armington Elasticities for the U.S. Food Industry

This paper provides estimates of elasticities of substitution between domestic and imported goods for 40 4-digit S.I.C. food manufacturing industries and explains the inter-industry differences among these coefficients in terms of industry sectoral characteristics. The results show that there is a wide range of variation among such elasticities and that the intensity of each industrys percentage of output sold to final consumers, foreign direct investment, expenditures on advertising and the existence of import quotas affect the degree of substitutability between domestic and foreign goods in the face of a relative price change.     

Tariff‐tax Reforms in Large Economies

This paper studies tariff‐tax reforms in a two‐region global New Keynesian model composed of a developing and an advanced region. In our baseline calibration, a revenue‐neutral reform that lowers tariffs in developing countries can reduce domestic welfare. The reason is that the increase in developing countries welfare due to higher output is dominated by the welfare losses stemming from the deterioration of the terms of trade. On the other hand, the reform increases output and welfare in the advanced countries and in the world as a whole. The effects that we highlight have not been studied in previous contributions to the literature, which looks at tariff‐tax reforms using a small open economy framework. Nominal rigidities have important implications for adjustment dynamics in our model. In the case of a ‘point‐for‐point’ reform, for example, price stickiness implies that the international dynamics of output is reversed compared to a revenue‐neutral reform.     

Trade Intermediaries and the Tariff Pass-through

This paper aims at improving our understanding of the price effects of trade policies following two perspectives. First, we wish to study how the role of intermediaries in international trade affects the transmission of tariff changes to domestic prices. Second, we explore how our results are influenced by the degree of competition in the distribution-service market. In a Cournot oligopoly-oligopsony model, we show how the pass-through of tariff cuts to domestic prices is limited by the market power of intermediaries producing distribution services. Our long-run equilibrium is characterized by a larger number of firms selling at a higher mark-up. Market access barriers in distribution services determine to what extent tariff cuts are transferred to domestic consumers and foreign producers, affecting the size of their welfare effects. The benefits of trade liberalization policies can be better achieved if they are complemented by competition enhancing measures in the intermediation sector.     

Sequential Product Design

I consider a model of duopoly where firms make sequential product design changes prior to price competition. I show that a socially desirable outcome is possible in this model. In equilibrium, the leader's product is less specific, implying a customer attraction strategy, and the follower's product is more specific, implying a customer retention strategy. This outcome is in contrast with the equilibrium outcome of a similar model, where simultaneous design competition takes place prior to price competition. In this latter model, the product designs are more specific and the prices are higher in equilibrium, leading to a reduction in welfare. I compare the design incentives under price competition with those in models where price collusion or merger is expected and with multi-product monopoly. In models with no price competition, less specific designs may serve to attract more customers, to improve current or future pie of monopoly profits, or to improve the outside option in bargaining game, depending on the model.     

THE TERMS OF TRADE IN THE PRESENCE OF RE-EXPORT TRADE: SOME FURTHER DEVELOPMENTS(*)

Abstract. In this paper we examine the measure of terms of trade changes, adjusted to take re-export trade into account, proposed by Lloyd and Sandilands (1985), and introduce two additional (but very basic) complications: a positive rate of growth and substitutability between imports and the domestic factor(s). We show that in such cases one can no longer establish a precise analogy with the traditional measure, and argue that the very notion of « a terms of trade change » becomes somewhat ambiguous. As an alternative view, we derive a measure of the impact of international price changes on what will be called « trade augmented » productivity; such a measure will be based on the movements of the wage-rate of profit frontier.