Domestic Purchase Requirement
30 Pages Posted: 19 Dec 2018 Last revised: 2 Jun 2019
Date Written: May 30, 2019
We consider the problem of allocating a tariff-rate quota among a small number of firms which act as middlemen between competitive producers and atomistic consumers and can import a perfect substitute at a fixed world price. We compare the traditional license-on-demand regime to administer such quotas with a domestic purchase requirement under which each firm is allocated a share of the quota that depends on the share of the total quantity bought from domestic suppliers. We give conditions such that the domestic purchase requirement strictly welfare-dominates the license system. Moreover, we show that for any binding import quota the welfare maximizing number of firms is finite.
Keywords: Tariff-Rate Quota, Import, Contest, Oligopoly, Oligopsony, Trade
JEL Classification: D45, F12, D43
Suggested Citation: Suggested Citation