Trade Policy And Time Consistency In An Oligopsonistic World Market

Jean-Philippe Gervais () and Harvey Lapan

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: This paper investigates the strategic behavior between countries that have purchasing power on the world market for a certain good. Tariffs and quotas are not equivalent protection instruments in this oligopsonistic market. Policy active importers would be better off by colluding and setting their trade instrument cooperatively. In a non-cooperative setting, if production decisions occur before consumption decisions, the ex-ante optimal policy is not time consistent because the ex-post elasticity of the residual foreign export supply curve is lower than the ex-ante elasticity. However, we show that the importers' inability to irrevocably commit to their trade instrument may be welfare superior to the precommitment solution. The negative welfare implication of noncooperative behavior may be balanced off by the welfare effect of the ex-post elasticity. A numerical example is proposed to provide insights on the theoretical results.

Date: 1998-11-01
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