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Quota‐Induced Cycles
Author(s) -
Miyagiwa Kaz,
Ohno Yuka
Publication year - 2001
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/1468-2354.00117
Subject(s) - tariff , oligopoly , economics , markov perfect equilibrium , microeconomics , production (economics) , monetary economics , markov chain , international economics , cournot competition , nash equilibrium , mathematics , statistics
We present a new framework to compare the dynamic effect of tariffs and quotas in the presence of oligopoly. Suppose that the domestic and the foreign firm play a quantity‐setting game over time in a perfectly stationary economy. A Markov‐perfect equilibrium has the foreign firm exporting at the constant rate under a tariff. In contrast, under the quota the rate of exports changes monotonically over the course of each year, causing seasonal fluctuations in domestic production. Quota‐induced cycles can make dynamic market segmentation possible and raise profits for both the firms above what they earn under the equal‐import tariff.