Domestic Regulation and the Preservation of Monopoly Power in Foreign Markets

Abstract

The purpose of this paper is to examine the extent to which the regulation of a discriminating exporting firm (industry) in the domestic market is socially desirable for the regulating country. In particular it focuses on how the monopolist's option to discontinue sales in the domestic market may limit the government's scope for regulation. This analysis parallels and expands on previous work by Auquier and Caves [1] and H. Katrak [3]. As in the above mentioned studies, the basic theme of this paper is that the welfare maximizing policies for a country whose exporting industry possesses monopoly power in both domestic and foreign markets are to enforce the competitive outcome at home while extracting monopoly profits abroad. Despite the common focus, the model employed and the assumptions made by Auquier and Caves differ from ours in several respects. Unlike us, for example, they assume that the exporting monopolist cannot discriminate between domestic and foreign markets. Thus they show that domestic enforcement of competition policy is not optimal from the national welfare point of view. This result stems from the fact that the enforcement of competition policy in the domestic market eliminates the monopoly position in both domestic and foreign markets. Consequently, domestic consumers benefit from lower prices, while national income declines as a result of the erosion in the monopoly rent extracted from foreign buyers. Optimally the gains and losses resulting from competition policy should be balanced, thus granting the exporting firm some degree of monopoly power, which is socialy desirable. One of the conclusions of this paper (Section III-2) concurs with the Auquier and Caves result. Although they consider competition policy while we consider price regulation, both papers conclude that in order to achieve second best (or constrained) optimum the price charged in the domestic market by the exporting monopolist should exceed the price that would prevail under perfect competition. Additionally, in the A & C study domestic and foreign prices are equal, whereas they differ in our analysis. This reflects our assumption that the exporting firm can discriminate between markets.