Import Quotas in the Stackelberg Trade Model

This note examines the effects of import quotas in the Stackelberg duopoly model of Baye (1992) in which a home firm is a leader and a foreign firm is a follower in the home market. This note shows that import quotas can increase social welfare of the importing country, measured by the sum of consumer surplus, producer surplus and quota rents accruing to the importing country, if the quotas are set at a sufficiently high level. An increase in binding quotas is also shown to increase social welfare of the importing country if it can extract more than half of the quota rents. Quotas are also compared to tariffs. Unlike in the competitive markets, optimal quotas are shown to be more conducive to trade than optimal tariffs in the Stackelberg trade model.