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License Price Paths: I. Theory II. Evidence from Hong Kong

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  • Kala Krishna
  • Ling Hui Tan

Abstract

In the first of the two companion papers, we show that the dynamic aspects of the license utilization decision in an uncertain environment, together with the usual policy of rewarding high license utilization with future license allocations. creates four components of the license price. These are the scarcity, asset, option, and renewal value components. Each of these components are identified and explored in the context of the existing literature. The effect of imperfections in the license market on license price paths is also explored. In the second paper, we use monthly data on license prices and utilization to test for the presence of imperfect competition in the market for apparel quota licenses in Hong Kong. A competitive structural model which respects the dynamic aspects of the problem is developed and estimated. We argue that concentration could affect the supply side as well as the demand side by affecting the cost associated with the search. The regressions indicate that concentration of license holdings affect the supply of licenses as predicted by models of imperfect competition. Since the implementation scheme encourages full utilization, imperfect competition affects the supply path of licenses rather than total supply. Concentration does not affect the demand side. which means that search costs are not an important consideration.

Suggested Citation

  • Kala Krishna & Ling Hui Tan, 1992. "License Price Paths: I. Theory II. Evidence from Hong Kong," NBER Working Papers 4237, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:4237
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    1. Trela, I. & Whalley, J., 1988. "Do Developing Countries Lose From The Mfa?," University of Western Ontario, The Centre for the Study of International Economic Relations Working Papers 8804c, University of Western Ontario, The Centre for the Study of International Economic Relations.
    2. repec:bla:econom:v:53:y:1986:i:211:p:339-50 is not listed on IDEAS
    3. Eldor, Rafael & Marcus, Alan J., 1988. "Quotas as options: Valuation and equilibrium implications," Journal of International Economics, Elsevier, vol. 24(3-4), pages 255-274, May.
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    Cited by:

    1. Janda, Karel, 2009. "Signaling the Strength of a Market Entrant," MPRA Paper 17007, University Library of Munich, Germany.

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