Discriminatory government procurement with a content requirement: Its protective effects and welfare costs

An examination is conducted of how a government price discrimination (GPD) policy combined with a physical content requirement (CR) affects the domestic structure of protection. An attempt is made to determine under what conditions final good and component producers will or will not obtain protection under the GPD-CR policy. The welfare costs of GPD-CR policy are examined along with how the magnitude of these costs compares to the costs of a tariff policy designed to accomplish the same protective effects. It is shown that the GPD-CR policy may not be nearly as protectionist as formerly believed. The size of government demand must be large relative to both the final good and component industries if both producer groups are to receive protection, and the equilibrium domestic component price must be below a level determined by the parameters of the model. Furthermore, if protection is granted to domestic producers by the GPD-CR policy, it will do so at lower welfare costs than alternative tariff policies.