Discriminatory Tariffs for a Monopolist Under Incomplete Information

We examine the incentives for a government to levy an optimal tariff on a foreign monopolist. With complete information, the size of the tariff is proportional to the firm's efficiency. By contrast, if the government is not completely informed about costs, there exists an incentive for the monopolist to strategically signal its inefficiency through export restraints if doing so brings about a lower tariff in future periods. We show that (i) the usual single crossing property of signaling games is not satisfied and (ii) under reasonable conditions the unique self-enforcing outcome involves the firm exporting the same quantity regardless of its efficiency. In other words, a policy of optimal discriminatory tariffs is unimplementable under incomplete information. The welfare consequences for the government are examined.