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On the Equivalence of Tariffs and Quotas with Incomplete Information

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  • Ning, Haokai

Abstract

This paper compares the social welfare effects of tariffs and quotas as strategic trade policy instruments in an oligopolistic industry where the domestic market demand is uncertain and the policy is chosen before the uncertainty is resolved. The uncertain demand, once realized, is assumed to be available only to the domestic firm when the output game is played between domestic and foreign firms. To highlight our assertion, a simple scenario with linear demand, additive stochastic market shock, homogeneous products, and identical constant marginal costs is considered. It is shown that a tariff is superior to a quota regardless of the degree of uncertainty. Moreover, we also show that a prohibitive quota that results in autarky is always preferred to a quota at the free-trade level.

Suggested Citation

  • Ning, Haokai, 2020. "On the Equivalence of Tariffs and Quotas with Incomplete Information," MPRA Paper 101512, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:101512
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    References listed on IDEAS

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    3. Ning, Haokai, 2020. "Strategic Trade Policy in Reciprocal Dumping Model with Incomplete Information," MPRA Paper 101530, University Library of Munich, Germany.
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    6. Ning, Haokai, 2020. "Choice of Trade Policy with Incomplete Information," MPRA Paper 101529, University Library of Munich, Germany.
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    8. Russell Cooper & Raymond Riezman, 2013. "Uncertainty and the Choice of Trade Policy in Oligopolistic Industries," World Scientific Book Chapters, in: Raymond Riezman (ed.), International Trade Agreements and Political Economy, chapter 16, pages 287-298, World Scientific Publishing Co. Pte. Ltd..
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    Cited by:

    1. Ning, Haokai, 2020. "Strategic Trade Policy in Reciprocal Dumping Model with Incomplete Information," MPRA Paper 101530, University Library of Munich, Germany.
    2. Ning, Haokai, 2020. "Choice of Trade Policy with Incomplete Information," MPRA Paper 101529, University Library of Munich, Germany.

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    More about this item

    Keywords

    Incomplete Information; Uncertainty; Bayesian Nash equilibrium; Tariff; Quota;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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