KEY POINTS

1. Free trade will lead a Home monopoly in a small country to act in the same way as a perfectly competitive industry and charge a price equal to marginal cost. Therefore, competition from imports eliminates the monopoly power of the Home firm.
2. Quotas are not equivalent to tariffs when the Home firm is a monopolist. Because a quota limits the number of imports, the Home monopolist can charge higher prices than under a tariff, which results in greater costs to consumers.
3. When a tariff is applied against a Foreign monopolist, the results are similar to those of the large-country case analyzed in the previous chapter: the Foreign monopolist increases the price in the importing country by less than the full amount of the tariff and allows its own net-of-tariff price to fall. Hence, the tariff is shared between an increase in the Home price and a decrease in the Foreign price, a terms-of-trade gain for Home.
4. Dumping is the practice of a Foreign firm exporting goods at a price that is below its own domestic price or below its average cost of production. If the price charged for the exported good is above the firm’s marginal cost, then dumping is profitable. We expect to observe dumping when the Foreign firm is acting like a discriminating monopolist.
5. Countries respond to dumping by imposing antidumping duties on imports. Antidumping duties are calculated as the difference between a Foreign firm’s local price (or average costs) and its export price. To reduce or avoid the antidumping duties, Foreign firms can raise their export prices. That increase in price is a terms-of-trade loss for the importer and occurs because the Foreign firm can influence the duty.
6. In the United States and other countries, the use of antidumping tariffs far exceeds the use of safeguard tariffs. It is easy for domestic firms to bring a charge of dumping, and in many cases upholding the charge results in an increase in foreign prices and a decrease in competition for the domestic firm. The excessive use of antidumping cases also invites other countries to respond with their own charges of dumping.
7. An infant industry is a firm that requires protection to compete at world prices today. When a government applies a temporary tariff, it expects that costs for the firm or the industry overall will fall due to learning, thereby allowing it to compete at world prices in the future.