Working Paper: NBER ID: w2612
Authors: Kala Krishna
Abstract: This paper has two aims. First, to examine alternative ways of modeling VERS in imperfectly competitive markets. This is important, since the. effects of VERS are sensitive to the models used. Second, to argue that the effects of VERS also depend on whether goods are complements or Substitutes. This point is illustrated by extending the model of Krishna (1983) to allow complementary goods to be produced by domestic and foreign firms. If goods are substitutes, VERs et at free trade levels raise all profits, while if they are complements, the VERS have no effect. Thus tariffs and quotas are fundamentally non-equivalent under Bertrand duopoly when substitute goods are produced, but are equivalent when complementary goods are being produced. This is contrasted to the case of Stackelberg leadership. Th. importance of specifying the effects of any restriction on the payoff functions of agents and using this to analyze its affects on equilibrium of the game is emphasized.
Keywords: Voluntary Export Restraints; Trade Policy; Imperfect Competition
JEL Codes: F13; F18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| substitutes (E41) | increase in profits (D33) |
| VERs set at free trade levels (F13) | increase in profits (D33) |
| VERs (when goods are substitutes) (D46) | increase in profits for domestic firms (F23) |
| VERs (when goods are substitutes) (D46) | increase in profits for foreign firms (F23) |
| complements (D10) | no effect on profits (F69) |
| VERs (when goods are complements) (D10) | no effect on profits (F69) |
| tariffs and quotas (F13) | fundamentally non-equivalent under conditions of Bertrand competition for substitutes (L13) |
| tariffs and quotas (F13) | equivalent for complements (D10) |