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Why exporting countries agree voluntary export restraints: The oligopolistic power of the foreign supplier

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  • De Santis, Roberto A.
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    Abstract

    This study analytically shows that a VER serves as an institution to protect incumbent firms of an exporting country. A VER is an entry barrier in the export market. It favours the concentration of industry, and allows established firms to better exploit economies of scale by producing output at lower average cost. Since the break-even price for potential firms is the average cost, entry in the domestic market is also inhibited, regardless of the form of competition. A VER also allows the raising of the price cost margin in the export market. However, the smaller the country, the greater the possibility also of a larger monopoly power in the domestic market. The impact on firm size is ambiguous. From the social point of view, three conventional effects from the elimination of a VER are usually considered: the rent loss effect, the efficiency effect and the export producer price effect. In this study, two further effects on welfare are examined: the increased intermediate inputs cost effect and the variety effect. The global effect on welfare on an exporting country is analytically indeterminate. A general equilibrium model applied to Turkey supports the conjecture that with the elimination of a VER, under Bertrand or Cournot conjectures, the loss in social welfare, the higher average cost, the fall of the concentration of the industry, and the fall of monopoly power of incumbent firms, are the key elements in understanding the rationale beyond VERs.

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    Bibliographic Info

    Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 841.

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    Date of creation: 1997
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    Handle: RePEc:kie:kieliw:841

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    Related research

    Keywords: VERs; Strategic Trade; AGE Analysis;

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    1. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
    2. Harrison, Glenn W. & Rutherford, Thomas F. & Tarr, David G., 1992. "Piecemeal trade reform in partially liberalized economies : an evaluation for Turkey," Policy Research Working Paper Series 951, The World Bank.
    3. de Melo, Jaime & Winters, L. Alan, 1993. "Do exporters gain from VERs?," European Economic Review, Elsevier, vol. 37(7), pages 1331-1349, October.
    4. Harrison, Glenn W & Rutherford, Thomas F & Tarr, David G, 1997. "Quantifying the Uruguay Round," Economic Journal, Royal Economic Society, vol. 107(444), pages 1405-30, September.
    5. Smith, Alasdair & Venables, Anthony J., 1988. "Completing the internal market in the European Community : Some industry simulations," European Economic Review, Elsevier, vol. 32(7), pages 1501-1525, September.
    6. Rosendorff, B.P., 1995. "Voluntary Export Restraints, Anti-Dumping Procedure and Domestic Politics," Papers 9512, Southern California - Department of Economics.
    7. Pomfret, Richard, 1989. " The Economics of Voluntary Export Restraint Agreements," Journal of Economic Surveys, Wiley Blackwell, vol. 3(3), pages 199-211.
    8. Trela, Irene & Whalley, John, 1995. "Internal Quota-Allocation Schemes and the Costs of the MFA," Review of International Economics, Wiley Blackwell, vol. 3(3), pages 284-306, October.
    9. Paul S. Armington, 1969. "A Theory of Demand for Products Distinguished by Place of Production (Une théorie de la demande de produits différenciés d'après leur origine) (Una teoría de la demanda de productos dis," IMF Staff Papers, Palgrave Macmillan, vol. 16(1), pages 159-178, March.
    10. repec:fth:geneec:93.11 is not listed on IDEAS
    11. Harris, Richard, 1984. "Applied General Equilibrium Analysis of Small Open Economies with Scale Economies and Imperfect Competition," American Economic Review, American Economic Association, vol. 74(5), pages 1016-32, December.
    12. Whalley, John & Yeung, Bernard, 1984. "External sector closing rules in applied general equilibrium models," Journal of International Economics, Elsevier, vol. 16(1-2), pages 123-138, February.
    13. Trela, Irene & Whalley, John, 1990. "Global Effects of Developed Country Trade Restrictions on Textiles and Apparel," Economic Journal, Royal Economic Society, vol. 100(403), pages 1190-1205, December.
    14. Krishna, Kala, 1989. "Trade restrictions as facilitating practices," Journal of International Economics, Elsevier, vol. 26(3-4), pages 251-270, May.
    15. Harrison, Glenn & Rutherford, Thomas & Tarr, David & DEC, 1994. "Product standards, imperfect competition and completion of the market in the European Union," Policy Research Working Paper Series 1293, The World Bank.
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