Tariff Agreements And Non-Renewable Resource International Monopolies: Prices Versus Quantitites

In this paper we model the case of an international non-renewable resource monopolist as a differential game between the monopolist and the governments of the importing countries, and we investigate whether a tariff on the resource importations can be advantageous for the importing countries. We find that the results depend crucially on the kind of strategies the importing country governments can play and on whether the monopolist chooses the price or the extraction rate. For a price-setting monopolist it is shown that the importing countries cannot use a tariff to capture monopoly rents if they are constrained to use open-loop strategies, even if the governments sign a tariff agreement. This result is drastically modified if the importing countries in the tariff agreement use Markov (feedback) strategies. For a quantity-setting monopolist the nature of the game changes and an open-loop tariff is advantageous for the importing countries. Moreover, in this case the importing countries in a tariff agreement enjoy a strategic advantage which allows them to behave as a leader.