Lecture 10 - Trade Policy under Imperfect Competition Flashcards
(14 cards)
For a foreign monopolist facing a specific tariff, does the price increase by the full amount of the tariff? What is this phenomenon called?
No, the price increase is less than the magnitude of the tariff. The foreign firm makes a strategic decision to absorb part of the tariff itself and pass only a portion onto the Home market to maximize profits. This is known as incomplete tariff pass-through.
What are the components of the change in Home welfare when a tariff is imposed on a foreign monopolist?
Consumer surplus falls (deadweight loss) and tariff revenue increases.
The net change is the tariff revenue minus the fall in consumer surplus. Specifically, it is the terms-of-trade gain (area e) minus the deadweight loss (area d).
According to Brander and Spencer (1984), under what condition does a small specific tariff improve Home welfare when importing from a foreign monopolist with constant marginal cost?
If marginal revenue is steeper than demand.
What idea was laid as a foundation by the findings of Brander and Spencer (1984)?
The idea of strategic trade policy, suggesting governments could potentially enhance welfare by intervening in imperfectly competitive markets with tariffs or subsidies.
What happened to the stock prices of Japanese automakers when the US-Japan VER was announced in 1981, and what did this suggest to the market?
Their stock prices shot up. This suggested the market believed the restrictions would raise their profits.
In a Cournot duopoly model with perfect substitutes, what effect does a specific import tariff have on the foreign firm’s reaction curve?
The foreign firm’s reaction curve shifts inward, meaning the foreign firm’s sales are optimally lower at every point given the choices of the home firm.
In a Cournot duopoly model with constant marginal costs, what can be said about tariff pass-through to the Home consumer price?
Tariff pass-through will be incomplete as long as marginal revenue slopes down.
The price the foreign duopolist receives (net of tariff) falls as the tariff increases.
What are the key welfare effects for the Home country from a small tariff under Cournot duopoly?
There are low efficiency costs (first term is small for small tariff).
There is a terms-of-trade gain because the foreign price falls.
There is a positive production distortion/gain because the tariff shifts sales to the home firm. In total, a small tariff raises the home country’s welfare.
What is “rent shifting” or “profit shifting” in the context of a Cournot duopoly tariff?
The tariff transfers some oligopolistic profits from the foreign oligopolist (e.g., Toyota) to the domestic one (e.g., GM).
This effect does not exist in perfect competition.
Why does the Cournot model (either tariff or quota) not fully explain the stock price increase of Japanese automakers upon the announcement of the VER?
Because the Cournot model predicts that the foreign firm (Toyota) would be worse off under a tariff or quota, which contradicts the market’s belief that their profits would rise (indicated by stock price increase).
What alternative imperfect competition model is considered to explain the US Auto VER, assuming the firms compete on price with imperfectly substitutable goods?
Bertrand duopoly with differentiated goods.
In a Bertrand duopoly model with differentiated goods, what is the effect of an import tariff on the foreign firm’s reaction curve and the equilibrium prices?
The foreign firm’s reaction curve shifts outward.
The tariff leads both firms to raise their (tariff inclusive) prices.
In a Bertrand duopoly with differentiated goods, what is the welfare implication of a tariff?
It is a good policy for domestic producers.
However, the overall impact on social welfare is ambiguous and depends on demand curve assumptions.
Based on the empirical analysis presented for US imports (trucks and motorcycles), what was found regarding tariff pass-through?
For trucks, tariff pass-through was less than one (0.57), meaning the foreign producer reduced its tariff-exclusive price.
For motorcycles, pass-through was estimated closer to or above one, suggesting the tariff increase was fully passed through to consumer prices.
