2(
1
1 2 2
1 2 1 2
1 t t t t t c c
tdm − dm = dc − dc = ds − ds = − . (4.11)
Corollary 4.1: From the equation (4.10), we see that domestic government will charge a higher tariff to the foreign exporting country with a lower marginal cost of production, but the tariff rate difference equals half the marginal cost difference, regardless of the managerial delegation forms.
4.3 Uniform Tariff
Case Ι Market Share Delegation
Consider the case that the domestic government has less than full discretionary power in setting tariff rates, and sets uniform tariff instead.
Stage II
Stage I Stage III
Time
Both foreign owners choose the market share delegation incentive to their managers to maximize profit.
Domestic government decides the uniform tariff rate.
Both foreign managers compete in quantity in domestic market.
Figure 4.3 Game stages of import-competing model with market share delegation in uniform tariff.
Now, equation (2.1) and (2.2) becomes
and α2 =α2(t). And then substituting them into stage 1 to maximize domestic social
which yields
)
Case Ⅱ Sales Delegation
Now we consider the case of sales delegation.
Stage II
Stage I Stage III
Time
Both foreign owners choose the sales delegation incentive to their managers to
maximize profit.
Both foreign managers compete in quantity in domestic market.
Domestic government decides the uniform tariff rate.
Figure 4.4 Game stages of import-competing model with sales delegation in uniform tariff.
The equation (2.1) and (2.2) rewrite as
which yields
)
Comparing equilibrium outcomes of optimal uniform tariff, output, welfare, and tariff revenue with the case of Cournot competition,
)
2 2
1 )
2 16(
1 a c c
Wuc = − + + , (4.22c)
. ) 2
32(
1 2
2
1 c
c a
TRuc = − + + (4.22d)
We then have the following proposition.
Proposition 4.2: The ranking of optimal uniform tariff rate, tariff revenue, and social welfare with different delegation forms are tuc >tum >tus , TRus >TRum >TRuc,
and . The ranking is the same as discriminatory case, regardless of the delegation forms.
uc um
us W W
W > >
From propositions 4.1 and 4.2, we obtained the similar results even in the presence of managerial incentive.
Corollary 4.2: Regardless of the delegation forms, uniform tariff is favorable for the low marginal cost of firm, and discriminatory tariff is advantageous to the high marginal cost of firm.
For example, by adding equation (4.5a), (4.5b), (4.16a), and (4.16b), we get )
2 )(
2 3 14(
Qdm ≡q1dm+q2dm=Qum≡q1um+q2um= 1 + a−c1−c2 , the case of market share
delegation. It means that the import quantities are the same regardless of discriminatory tariff or uniform tariff. Further, form demand function,
, we know that the equilibrium price under discriminatory and uniform tariff are the same. If this assumed that the marginal cost of firm 1 is lower than firm 2, then according to (4.5a), (4.5b), (4.16a), and (4.16b), we can find that
and . By the same token,
2
1 q
q a p= − −
dm
dm q
q1 > 2 q1um > q2um
) 2
3( 1
2 1 2
1 2
1 q Q q q a c c
q
Qds ≡ ds + ds = us ≡ us + us = − − , the case of sales delegation. Uniform
tariff is still favorable for the low marginal cost of firm, and discriminatory tariff is advantageous to the high marginal cost firm.
The difference of tariff revenue and social welfare under different tariff regimes are4
0
Table 4.1 Change of social welfare under different tariff regime
Market-share Delegation Sales Delegation Welfare
From Table 4.1, we can further see the change of tariff revenue and social welfare under different tariff regime.
Proposition 4.3: Even though , social welfare and tariff revenue is higher under discriminatory tariff than under uniform tariff, regardless of the delegation forms. The social welfare and tariff revenue improve with sales delegation than with market share delegation under discriminatory tariff regime.
us
4 The welfare equals tariff revenue plus consumer surplus. But the difference of consumer surplus (CS) equals zero. For example,
2
2, we have , so . Hence, under different tariff regimes, the difference of social welfare equals the difference of tariff revenue.
Q
Qdm= um CSdm−CSum=0
4.4 Concluding Remark
In this paper, we constructed a model un that domestic country does not produce goods, importing from two foreign countries and imposes a discriminatory or uniform tariff on import goods. We demonstrated that whether it is discriminatory or uniform tariff rate, the optimal tariff rate is the highest under Cournot competition, and sales delegation is the least. We also showed that domestic government will charge a higher tariff to the foreign exporting country with a lower marginal cost of production, but the tariff rate difference equals half the marginal cost difference, regardless of managerial delegation forms. Furthermore, we obtained that the social welfare and tariff revenue is higher with sales delegation than market share delegation under discriminatory tariff regime.
CHAPTER FIVE: CONCLUSIONS
This thesis of the main purpose is to examine export subsidy and import tariff policy in international oligopoly with managerial delegation. The results can be dividend into three main parts.
In chapter two, in order to deal with three-stages game, we construct a new market share delegation form which not only preserves the spirit of Jansen et al. (2007) but also becomes useful in dealing with the three-stage game of concerned issues as well, and furthermore we showed in a duopoly mode, if only one firm adopt delegation, regardless of market share delegation or sales delegation, it acts as Stackelberg leader.
In chapter three, we extend the model in chapter two to apply in international oligopoly and discuss the optimal subsidy policy. Here we demonstrated that delegation and export subsidy is substitutable for profit-shifting. Considering the timing of instrument choice with one-sided delegation, in a sequentially chosen instrument game, the foreign government pre-commits export subsidy to its entrepreneurial firm, such policy is used to shift profit from a rival firm; in consequence, the home government “stays put” without intervention and let the private sector provides incentives to its managers for competing with the foreign rival firm, sales delegation and market share delegation are substitutable. However, in a simultaneously chosen instrument game, the domestic firm and foreign government commit strategic instruments simultaneously; sales delegation and export subsidy are substitutable, but market-share delegation is a welfare-dominant strategy. Furthermore, for the case of two-sided delegation, the welfare of both countries under market share delegation is higher than that of sales delegation whether one country or two countries intervene. At end, we must point out that in the case of bilateral choices of incentives,
two export firms are involved in a “Prisoner’s Dilemma”, but market share delegation is in less degree.
In chapter four, we constructed a model that domestic country does not
produce goods, importing from two foreign countries and imposes a discriminatory or uniform tariff on import goods. We demonstrated that whether it is discriminatory or uniform tariff rate, the optimal tariff rate is the highest under Cournot competition, and sales delegation is the least. We also showed that domestic government will charge a higher tariff to the foreign exporting country with a lower marginal cost of production, but the tariff rate difference equals half the marginal cost difference, regardless of managerial delegation forms. Furthermore, we obtained that the social welfare and tariff revenue is higher with sales delegation than market share delegation under discriminatory tariff regime.
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