Working Paper: NBER ID: w1537
Authors: Kala Krishna
Abstract: Thereare three points made in this paper. The first is that the question concerning choice of a product line by a monopolist is similar in structure to other adverse selection problems -- and can be analyzed in an elementary way by adapting techniques recently developed for such problems. Such an analysis is developed in the first section. The second is that when a foreign monopolist produces a product line, protection will change the composition of the entire product line.The nature of such effects is studied in the second section and this analysis is greatly simplified by the results of the first sectton. In line with empirical work on the subject, quotas are shown to raise the average quality of imports, while the effects of tariffs are ambiguous.The third concerns the possibility of profit shifting protection which is welfare increasing. The welfare consequences of protection are analyzed in the third section, and are shown to depend crucially on the distribution of consumers.
Keywords: trade protection; monopoly; product quality; welfare effects; tariffs; quotas
JEL Codes: F12; F13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade restrictions (quotas) (F14) | average quality of imports (F14) |
| quotas (C80) | higher relative demand for higher-quality products (L15) |
| tariffs (F13) | average quality of imports (F14) |
| tariffs (F13) | lower quality chosen by consumers (L15) |
| tariffs (F13) | removal of low-quality consumers from the market (D49) |
| tariffs (F13) | national welfare (I39) |
| revenue from tariffs (H20) | loss in consumer surplus (D11) |