Drawbacks for Indirect Exporters and Monopoly Power
Abstract: The paper presents different methods for extending export drawback schemes to ‘indirect exporters’, i.e. firms that sell inputs to exporters. We review the schemes to extend export drawbacks to indirect exporters that have been adopted in Chile, Korea and Colombia. To compare them, we consider a market structure where the indirect exporter is a monopolist. We assume he must charge a linear price because of potential for a resale market for the input. We find that the Korean scheme is reasonably efficient. The Colombian scheme excludes small exporters and promotes vertical integration artificially. The Chilean scheme allows the input monopolist to charge a fixed fee to the final exporters, leading to unexpected results: If the optimal pricing policy is of a certain type, national welfare rises but input prices do not fall and no previously inactive firm enters the export business. If the optimal pricing policy is of the other possible type, the input price may rise or fall, depending of the shape of the demand curve. If the input price rises enough, national welfare would fall. We suggest an alternative scheme, based on the Colombian one, that should do better than the Korean and Chilean schemes.
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