The Case of the Vanishing Revenues: Auction Quotas With Oligopoly

Abstract

This paper examines the effects of auctioning quota licenses when market power exists. The overall conclusion is that with oligopolistic markets, quotas, even when set optimally and with quota licenses auctioned off, are - unlikely to dominate free trade. Moreover, auction quotas only strictly dominate giving away licenses which are competitively traded if the quota is quite restrictive. When there is a foreign duopoly or oligopoly and domestic competition it is shown that such sales of licenses does not raise revenues unless they are quite restrictive. An oligopoly example is explored to study the role of product differentiation, demand conditions and market conditions in determining the value of a license and the welfare effects of auctioning quotas. In this example, auction quotas are always worse than free trade. Finally, when there is a home duopoly and foreign competition, the price of a quota license is shown to be positive when the home and foreign goods are substitutes but to be zero when they are complements.