Publication

Tariff-Rate Quotas (TRQs) have replaced quotas at the end of the Uruguay Round.  We analyze TRQs when a foreign firm compete against a domestic firm in the latter's market. In this imperfectly competitive setting, our benchmark is the strategic rent-shifting tariff imposed by a government wishing to manipulate the rivalry between the domestic and foreign firms.  We show that the domestic-price equivalent TRQ is a better instrument welfare-wise as it can extract all of the rents from the foreign firm.  The within-quota tariff is set at a higher level than the above-quota tariff.  We show that different pairs of within-quota tariff and quota can support full rent extraction.  The implication is that reduction of the former and enlargement of the latter, holding the above-quota tariff constant, may have no liberalizing effects.  The first-best TRQ and the strategic tariff generate different prices.  When firms have identical and constant marginal cost, the first-best TRQ entails selling a subsidy to the foreign firm and forcing the exit of the domestic firm.  The main implication is that TRQs could be set up to extract rents from foreigners as opposed to giving them rents.