Working Paper: NBER ID: w2840
Authors: Kala Krishna
Abstract: This paper examines the effects of auctioning quota licenses when monopoly power exists. With a foreign monopoly and domestic competition the sales of licenses will raise any revenue if domestic and foreign markets are segmented. More surprisingly, the inability to raise revenue is shown to persist even when partial or perfect arbitrage across markets is possible, as long as the quota is not too far from the free trade import level. In contrast, when there is a home monopoly and foreign competition, the price of a quota license can be positive so that selling licenses can dominate giving them away. However, because of the absence of any profit shifting, welfare falls even when licenses do indeed raise revenue.
Keywords: Auction Quotas; Monopoly; Welfare Economics
JEL Codes: D42; L13; L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| foreign monopoly and segmented markets (D42) | zero revenue from auctioning quota licenses (D45) |
| foreign monopoly and segmented markets (D42) | pricing of quota licenses (D45) |
| home monopoly and foreign competition (F23) | positive price of quota licenses (D45) |
| positive price of quota licenses (D45) | potential revenue generation (H27) |
| absence of profit from auctioning (D44) | decrease in overall welfare (D69) |
| market structure (monopoly vs. competition) (L11) | welfare outcomes (I38) |