6 Consider a slight variation of the dynamic monopoly game t

6. Consider a slight variation of the dynamic monopoly game talked about in class. Suppose a manager (Tony) is selling to one high-type, enthusiast customer (Hal) and only one low-type customer (Laurie) (a) Analyze this game and explain why P2 200 is not optimal if Hal does not purchase a monitor in pe- riod 1. Find the optimal pricing scheme for Tony Discuss whether Tony would gain from being able to commit to not selling monitors in period 2. (b) Finally analyze the games with one of each type of customer and ownership benefits given in the follow- ing figure. In this case, would Tony gain from being able to commit to not selling monitors in period 2? Period Period Benefit to Ha 1200 300 Benefit to Laurie500 200

Solution

,862 answers

a. If the foreign export supply is perfectly elastic, in a small-country, the incidence of the tariff is shouldered completely by consumers and there is no terms-of-trade gain to applying a tariff, hence, the optimal tariff should be zero.

So statement is False

b. If the foreign export supply is less than perfectly elastic, in a large-country, the optimal tariff is determined as: t=1/E*_X, where E*_X is the Foreign export supply elasticity. Hence, there exists a tariff to increase welfare.

So statement is True

c. For a tariff higher than the optimal tariff, welfare declines because deadweight losses increasingly outweigh terms-of-trade gains. For a sufficiently high tariff, welfare can go as low as the autarky level. Hence, government cannot make more revenue.