Economies of scale, price discrimination and exporting

Abstract

The purpose of this note is to consider optimum policy towards ah exporting industry subject to economies of scale where the export price covers marginal, but not average costs. The following questions are considered: (1) Should an industry be allowed to practice price discrimination against domestic customers if this is necessary for its survival? (2) Should an import tariff be provided if this is necessary to make survival through price discrimination possible? This latter question is raised by the popular argument from manufacturers the world over: “protect me from imports so that I can export”. (3) Is there a role for subsidies of some kind to the industry? The analysis extends earlier work by Corden ( 1967) and Basevi (1970)? We assume that the industry consists of a single firm (or a group of firms subject to economies of scale behaving like a single rfirm). The country cannot affect the import or thie export price of the product. Output changes cause no changes in the rents of factors othei than the r&nt of capital (so that al! changes in ‘producers’ surplus’ are changes in the pure profit of the firm) (see Mishan ( 1968)). The demand c’urve is income-compensated in the usual Hicksian matmer SC that changes in ‘consumers’ surplus’ r’nay be interpreted, e.g., as compensaGng varia-