The Case of the Vanishing Revenues: Auction Quotas with Monopoly

This paper examines the effects of auctioning quota licenses when monopoly power exists. With a foreign monopoly and domestic competition the sales of licenses will raise any revenue if domestic and foreign markets are segmented. More surprisingly, the inability to raise revenue is shown to persist even when partial or perfect arbitrage across markets is possible, as long as the quota is not too far from the free trade import level. In contrast, when there is a home monopoly and foreign competition, the price of a quota license can be positive so that selling licenses can dominate giving them away. However, because of the absence of any profit shifting, welfare falls even when licenses do indeed raise revenue.