Allocating Tariff-Rate Quotas : The Case of Domestic Purchase Requirement

We consider the problem of allocating a tariff-rate quota among a small number of firms which act as middlemen between competitive producers and atomistic consumers and can import a perfect substitute at a fixed world price. We compare the traditional license-on-demand regime to administer such quotas with a domestic purchase requirement under which each firm is allocated a share of the quota that corresponds to the share of the total quantity bought from domestic suppliers. We give conditions such that the domestic purchase requirement strictly welfare-dominates the license system. Moreover, we show that for any binding import quota the welfare maximizing number of firms is finite