Proportional Import Restraints in Oligopoly

Abstract

We study the differences in the impact of trade restrictions on the level of imports (e.g. 200,000 automobiles per years) and restrictions defined in terms of market shares (e.g. 10% of the market). We argue that if domestic firms enjoy some market power proportional trade restrictions have a stronger anticompetitive effect than volume restrictions, and therefore lead to higher equilibrium prices and lower social welfeare. In the case of Cournot competition and constant marginal costs, with proportional import restraints the equilibrium price sticks to the autarchic level, independently of the market share reserved for foreign firms. As a consequence, enlarging the share of imports does not increase consumers surplus and negatively affects the profits of domestic firms, thus lowering social welfare.