Abstract This article presents examples of arbitrage deterrence from the pharmaceutical, chemical and auto industries. Based on these cases, it develops two models where a monopolist prices and spends to deter arbitrage. The models differ in whether the lower price is set by the firm or negotiated with a representative of consumers. In both models, imports into the high-price market are completely deterred, but the two markets are nonetheless linked by the threat of arbitrage. If this linkage is ignored and the absence of arbitrage is misattributed to exogenous factors, econometric estimates of firm bargaining power will be biased upwards.
When all parties to an agreement are subject to the laws of a single jurisdiction, then anyone breaking that agreement can be subjected to legal sanctions. If, however, parties to an agreement are themselves sovereign states, no external force exists to assure compliance. In such cases the design of an agreement must somehow provide an internal enforcement mechanism or the agreement is likely to be violated. An agreement is regarded as a specification of how each party will perform in any contingency which might arise. An agreement is called self‐enforcing if it provides no country with an incentive to violate its terms as long as every other country complies. This paper considers the possibility of designing self‐enforcing agreements among oil‐importing nations to achieve the following goals: (1) to expand government or private stockpiles in preparation for the next disruption of crude imports; (2) to insure that no country will impose price controls should an embargo occur; (3) to share restricted oil supplies during an embargo; and (4) to restrain import demand during a crisisThe paper outlines how a self‐enforcing agreement to increase world stockpiles can be designed. It indicates by example measures a county can take in advance to make subsequent imposition of price controls during a crisis disadvantageous. Such measures make credible a government's prior promise not to impose price controls. While a multilateral effort to restrain demand during an embargo would be worthwhile, no self‐enforcing agreement seems possible. Finally, plans to redirect limited oil supplies by fiat during an oil crisis are criticized as unnecessary, inevitably ineffective, and a diversion of collective efforts from more pressing tasks. Such a sharing agreement is the focus of the existing International Energy Program (IEP) in which the United States and 20 other oil‐importing nations participate
