Quota as a Competitive Device

Abstract

When entry of the relatively inefficient firms is deterred due to fixed costs, leading to a monopoly of the relatively efficient firm, guaranteed production quota for the less efficient ones can increase consumers' surplus. In other words, restricting the output of more efficient firm helps to reduce the price compared to the monopoly level. If the emergence of monopoly is independent of the level of fixed costs of the inefficient competitors, monopoly is the more efficient outcome. This has relevance for the recent entry of China in WTO and the abolition of export quotas in textiles. This also qualifies the conventional wisdom in the trade policy literature that quantitative restrictions are necessarily anti-competitive. The optimal policy can be to keep in place a quota but allow it to be licensed to the more efficient exporter.

Keywords: Consumer surplus, Entry, Quota

JEL Classification: F12, F13, D43, O24