Publisher's Synopsis
Excerpt from Quotas and the Stability of Implicit Collusion
This paper shows that the imposition of an import quota by one country can lead to increased international competitiveness: protection can reduce the price in the country that imposes the quota, the foreign country, or both. This somewhat paradoxical result emerges from a model of implicit collusion. In such a setting the firms in an industry sustain collusive prices by the threat that more competitive pricing will ensue if any firm deviates. The more powerful the threat, the more collusion that can be sustained. Since a quota reduces the ability of the foreign firms to punish a deviating domestic firm, the amount of collusion that can be sustained is correspondingly diminished.
We study both the case in which sales and the case in which prices are the strategic variables. Our results are strongest when prices are the strategic variables: quotas always make monopolization of the domestic market more difficult in that case. This is in sharp contrast to the results in static imperfect competition models in which quotas tend to make it easier for the domestic firm to act as a monopolist at home. It is also different from the impact of tariffs which, in a dynamic setting like the one studied here, do not necessarily make it more difficult for the firms to sustain collusive outcomes.
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