MARKET-SHARE QUOTAS

Anecdotal evidence reveals that an import quota is not always filled when the quota is specified in terms of a market-share limit instead of a quantity limit. In a simple Cournot duopoly, we show that imposing a market-share quota eliminates pure-strategy equilibria. Instead, a mixed-strategy equilibrium occurs where the quota is not binding under one of the two equilibrium domestic strategies. Compared with a tariff that restrains the foreign market share to an equivalent level, domestic output (and social welfare) may be higher under a market-share quota.