Lobbying for Tariff Protection, International Technology Licensing and Consumer Surplus

1 Introduction

The text book view suggests that tariff protection makes the domestic consumers worse off by distorting the firms’ choice of outputs. However, in an interesting paper, Kabiraj and Marjit (2003) argued that tariff protection may benefit the domestic consumers by attracting superior foreign technologies through international technology licensing.^[1] Hence, they suggest that the protectionist view for tariff protection can be justified if the tariff induced international technology licensing benefits the consumers.^[2] We show that this conclusion may not hold true if the tariff rate is influenced by lobbying by the domestic firm. Hence, whether the protectionist view for tariff protection can be justified under international technology licensing depends on the way the tariff rates are determined.

While the literature on international technology licensing under endogenous tariff protection provides important insights, it is restrictive due to its attention on welfare-maximising governments.^[3] It is widely recognised that trade policies are often influenced by many special interest groups (Bhagwati 2000; Cai and Li 2014; Findlay and Wellisz 1982; Gawande, Krishna, and Olarreaga 2012; Grossman and Helpman 1994; Hillman 1989; Kayalica and Lahiri 2007; Long and Soubeyran 1996; Magee, Brock, and Young 1989; Mayer 1984; Mitra 1999; Weymouth 2012, to name a few) and domestic firms often lobby for tariff protection. Given this background, we examine how lobbying for tariff protection by the domestic firm affects international technology licensing and the corresponding consumer surplus.

To show the implications of lobbying by the domestic firm for tariff protection, we consider the non-committed tariff game of Kabiraj and Marjit (2003), where they consider the following situation.^[4] There is a technologically superior^[5] foreign firm and a technologically inferior domestic firm competing in the domestic country. At stage 1, the foreign firms decides whether to license its technology to the domestic firm against a fixed-fee.^[6] At stage 2, the domestic government imposes a per-unit tariff on the foreign firm’s output to maximise welfare of the domestic country. At stage 3, they compete in the product market like Cournot duopolists.

The motivation for considering the non-committed tariff game comes from the time inconsistency problem. As Staiger and Tabellini (1987) mentioned, governments with some degree of discretion in policy may find it difficult to commit. The time inconsistency problem is considered in many contexts, such as in trade and industrial policy (Kabiraj and Marjit 2003; Mukherjee and Pennings 2006; Neary and Leahy 2000), investment subsidies (Harstad 2020), environment policy (García, Leal, and Lee 2018; Iida and Mukherjee 2020), monetary policy (Barro and Gordon 1983; Berlemann 2005; Kydland and Prescott 1977; Minford 1995), euro crisis (Willett and Srisorn 2014), utility regulation (Lim and Yurukoglu 2018), bank closure (Acharya and Yorulmazer 2007) and consumer’s preference (Sayman and Öncüler 2009). In our context, even if the domestic firm can lobby before the licensing contract, its opportunistic behaviour ex-post licensing to gain a higher market share may create the motivation for the non-committed policy. As the welfare maximising government in Kabiraj and Marjit (2003) has the incentive for changing the tariff rate ex-post licensing, the domestic firm in our analysis can change the lobbying effort ex-post licensing to raise the tariff rate for extracting a higher market share from the foreign firm.

Although we consider the non-committed tariff game like Kabiraj and Marjit (2003), we differ from them in the way the tariff rate is determined. Unlike their paper, which considers welfare-maximising tariff rate, we consider that the tariff rate is influenced by lobbying by the domestic firm.^[7] Lobbying by the domestic firm only can be justified by Kayalica and Lahiri (2007) and Bandyopadhyay, Lahiri, and Wall (2012), which suggest that in many countries, it is legal for political parties to accept political contributions from the nationals of that country, but it is illegal to accept foreign contributions, and it is illegal in some countries to bribe abroad.

We consider two separate political economy models of lobbying – first, the “tariff-function formation” approach of Findlay and Wellisz (1982) and Long and Soubeyran (1996), and second, the widely used “political contribution” approach of Grossman and Helpman (1994). The first approach does not give consideration to welfare. Hence, it considers tariff formation in a way that is significantly different from the welfare-maximising tariff protection considered by Kabiraj and Marjit (2003). Thus, this model helps us to show the importance of the process of tariff formation in the simplest way. The second approach cares both welfare and political contribution, thus showing the implications of lobbying when the government also cares about domestic welfare.

We derive the following results. Whether we consider the “tariff-function formation” approach or the “political contribution” approach, the tariff rate is higher under licensing compared to no licensing. However, these models have different effects on the incentive for licensing and consumer surplus. The incentive for licensing is lower under lobbying compared to no lobbying under the “tariff-function formation” approach, while it is higher under the “political contribution” approach. While lobbying (compared to no lobbying) reduces consumer surplus under the “tariff-function formation” approach, the effect is ambiguous under the “political economy” approach. Hence, lobbying and the way it affects tariff protection may play an important role in determining the incentive for licensing and the corresponding consumer surplus.

Our results are strikingly different from Kabiraj and Marjit (2003). They show that welfare-maximising tariff protection benefits the consumers in the importing country by inducing technology licensing, thus suggesting that if free trade cannot attract foreign technologies, restrictive trade policies help to attract foreign technologies and benefits the consumers. In contrast, we show that tariff protection through lobbying may reduce the incentive for technology licensing and consumer surplus. Even if tariff protection through lobbying increases technology licensing, it may still reduce consumer surplus. Hence, if technology licensing does not occur under free trade, it is not necessary that tariff protection will induce international technology licensing and will improve consumer surplus. Therefore, one needs to be more cautious about the way tariff is determined when considering the effect of tariff induced international technology licensing.

When tariff protection induces technology licensing in our paper, the mechanism is different from Kabiraj and Marjit (2003). Technology licensing in their analysis reduces the tariff rate and therefore, benefits the foreign licenser by reducing its tariff inclusive cost. In contrast, tariff protection in our paper increases the incentive for licensing when it is higher under licensing. Higher tariff protection under licensing helps to increase the competitiveness and the profit of the domestic firm and the foreign firm can use the licensing fee to extract this benefit from the domestic firm.

To the best of our knowledge, there is no empirical research analysing how lobbying for tariff protection affects product-market competition and international technology licensing. Our results provide testable hypothesis for future empirical research on international technology licensing in the presence of lobbying for tariff protection.

The remainder of the paper is organised as follows. Section 2 describes the model and considers licensing under free trade. Section 3 considers licensing under the tariff-formation function approach of lobbying. Section 4 considers licensing under the political contribution approach of lobbying. Section 5 concludes.

2 The Model and the Results

Assume that there are two firms, a foreign firm (firm F) and a domestic firm (firm D). The foreign firm exports to the domestic country from the foreign country and the firms compete in the domestic country like Cournot duopolists with homogeneous goods. Assume that the constant marginal costs of productions for the domestic and foreign firms are c _d and c f c d > c f respectively. For simplicity, consider c _f = 0 and c _d = c. Assume for simplicity that there is no transportation cost of exporting.

Assume that the inverse market demand function is

where P is price and q is the total output. We assume that c < a 2 ≡ c max to ensure that both firms always produce positive outputs under no lobbying.

3 Licensing under Lobbying: Tariff-Formation Function Approach

Now consider lobbying by the domestic firm for tariff protection. In this section, we consider the tariff-formation function approach, as in Findlay and Wellisz (1982) and Long and Soubeyran (1996), where a tariff level is determined as a stable function of the resources committed to the political process by the interest group. This approach follows Findlay and Wellisz (1982) and Long and Soubeyran (1996), and as mentioned above, it helps to show the implications of lobbying by ignoring welfare-maximising tariff, thus considering tariff formation in a way that is significantly different from Kabiraj and Marjit (2003). We will consider the political contribution approach of Grossman and Helpman (1994) in Section 4.

Assume that the foreign firm faces a tariff t(e) per unit of its output where e is the domestic firm’s lobbying expenditure with t(0) = 0, t′ > 0, and t″ ≤ 0. Hence, the domestic government supports free-trade in the absence of lobbying. However, lobbying is costly and the domestic firm has to incur a cost R(e) for lobbying with R(0) = 0, R′ > 0 and R″ > 0. This formulation is similar to Long and Soubeyran (1996).

The reason for a convex lobbying cost can be attributable to the loss of resources, such as labour force, for productive activities, as in Findlay and Wellisz (1982). Labour could be used for lobbying and other productive activities. If the domestic firm increases lobbying, it needs more labour for that activity, implying that it has less labour for other productive activities. As the domestic firm uses more and more labour for lobbying, it has less and less labour for other productive activities, which reduces other activities at an increasing rate due to the diminishing marginal productivities of labour in other activities, thus increasing the cost of lobbying at an increasing rate. In other words, as the labour for lobbying increases, the opportunity cost of lobbying increases at an increasing rate.

The property of t(e) could be explained in the following way. As the domestic firm increases lobbying, it may not change the government official’s incentive for imposing further tariff, implying that the rate of change of tariff following lobbying remains constant in this situation. Alternatively, the domestic firm may find it harder to convince the government official for increasing the tariff rate when it already increased the tariff rate following lobbying; in this situation, the rate of change of tariff following lobbying reduces.

It is worth mentioning that our result will hold with different assumptions for t″ and R″, as long as the second order condition for the domestic firm’s profit maximising lobbying effort holds.

We consider the following game in this section. At stage 1, the foreign firm decides whether to license the technology. At stage 2, the domestic firm decides whether to accept the licensing contract. The domestic firm accepts the licensing contract if it is not worse off compared to the situation with no licensing. At stage 3, the domestic firm lobbies for tariff on the foreign firm’s output. At stage 4, the firms compete like Cournot duopolists and the profits are realised. We solve the above game through backward induction.

We consider a situation where the domestic firm lobbies after the technology licensing decision. It is a reasonable sequence to consider since, after the licensing decision, the domestic firm has the incentive to increase its profit by making the foreign firm less competitive by lobbying for a tariff protection.^[9]

First, consider the game under no licensing. Given the tariff rate created by the lobbying expenditure, firms D and F maximise the following expressions to determine the respective outputs in stage 4:

We get the equilibrium outputs of firms D and F under no licensing as q d , l o = a − 2 c + t ( e ) 3 and q f , l o = a − 2 t ( e ) + c 3 . We assume that both firms produce positive outputs under lobbying.^[10] The corresponding equilibrium profits are π d , l o = a − 2 c + t ( e ) 3 2 and π f , l o = a − 2 t ( e ) + c 3 2 .

At stage 3, the domestic firm chooses the lobbying expenditure to maximize the following expression:

The equilibrium lobbying expenditure is given by

Assume that the second order condition for maximization is satisfied, i.e. 2 9 t ′ 2 + 2 9 a − 2 c + t t ″ − R ″ = Z < 0 . Define the equilibrium lobbying expenditure under no licensing by e n * . Hence, the equilibrium tariff under no licensing is t e n * .

The equilibrium profits of the domestic and foreign firms under no licensing are respectively π d , l o , n = ( a + t e n * − 2 c ) 2 9 − R e n * and π f , l o , n = ( a − 2 t e n * + c ) 2 9 , and the corresponding equilibrium industry profit is

Next, consider the situation under licensing. If both firms produce positive outputs under licensing, the equilibrium outputs and profits under licensing can be found by setting c = 0 in the equilibrium values under no licensing. The equilibrium outputs of the domestic and foreign firms are q d , l o , l = a + t ( e l * ) 3 and q f , l o , l = a − 2 t ( e l * ) 3 respectively, where e l * shows the equilibrium lobbying expenditure under licensing and t e l * is the corresponding equilibrium tariff rate. The corresponding equilibrium profits are π d , l o , l = a + t e l * 2 9 − R e l * − K and π f , l o , l = a − 2 t e l * 2 9 + K . The equilibrium industry profit under licensing is:

If the marginal cost of production of the domestic firm decreases, it gives the domestic firm a higher market share and, therefore, higher profit for any given lobbying expenditure, which, in turn, induces the domestic firm to increase the lobbying expenditure. Hence, licensing increases the equilibrium lobbying expenditure and the equilibrium tariff rate compared to no licensing by reducing the marginal cost of the domestic firm.

For a clear exposition with the closed form solutions, we take the lobbying function and the cost of lobbying as

Hence, B = 0 will replicate the situation under no lobbying.

We assume B > 0 and A > B 2 3 , which ensure that both firms produce positive outputs irrespective of licensing. We avoid corner solutions, since that will not add much to our main point. The parameter B represents the effectiveness of lobbying in creating the tariff rate. The parameter B will be high if the government official is lenient in setting the tariff rate following domestic firm’s lobbying effort. However, the term B will be low if the government official is not very responsive to the domestic firm’s lobbying effort.

Given the functions in (10), the equilibrium tariff rates and the lobbying expenditures under no licensing and licensing are respectively

Therefore, the costs of lobbying under no licensing and licensing are respectively

The equilibrium outputs of firms D and F under no licensing are respectively q d , l o , n = 3 A ( a − 2 c ) 9 A − B 2 > 0 and q f , l o , n = a ( 3 A − B 2 ) + c ( 3 A + B 2 ) 9 A − B 2 > 0 . The equilibrium industry profit under no licensing is Ω l o , n = a 2 18 A 2 − 7 A B 2 + B 4 − 2 a 9 A 2 − 2 A B 2 + B 4 c + 45 A 2 + 2 A B 2 + B 4 c 2 9 A − B 2 2 .

The equilibrium outputs of firms D and F under licensing are respectively q d , l o , l = 3 A a 9 A − B 2 > 0 and q f , l o , n = a ( 3 A − B 2 ) 9 A − B 2 > 0 . The equilibrium industry profit under licensing is Ω l o , l = a 2 18 A 2 − 7 A B 2 + B 4 9 A − B 2 2 .

Due to the reason mentioned in subsection 2.1, technology licensing is profitable if Ω _lo,l > Ω _lo,n ,^[11] or

where c″ < c′,^[12] implying that lobbying reduces the incentive for licensing when both firms produce positive outputs under no licensing and licensing, which gives the following result immediately.

The reason for the above result is as follows. There are two opposing effects of lobbying on the incentive for licensing compared to free trade that occurs under no lobbying in this section. First, if the foreign firm faces the same tariff rate irrespective of the licensing decision, it increases the possibility of licensing by reducing the cost difference between the firms.^[13] This is similar to Kabiraj and Marjit (2003). Second, higher lobbying effort and higher tariff rate under licensing compared to no licensing tends to reduce the benefit from licensing. On the balance, the second effect dominates the first effect and lobbying reduces the incentive for licensing.

4 Licensing under Lobbying: Political Contribution Approach

We considered in Section 3 a situation where tariff determination through lobbying did not care about welfare. Although it helped to show that the implications of tariff on technology licensing and consumer surplus can differ significantly when tariff is not determined to maximise welfare, a more general framework may need to focus also on welfare when lobbying by the domestic firm influences the tariff rate. To do this, we consider in this section the widely used political contribution approach of Grossman and Helpman (1994), where the government maximises the tariff rate by giving weights on both welfare and political contributions.

Following Grossman and Helpman (1994), we consider that the domestic government maximises

where W = (π _d,lo + CS + T), L is the domestic firm’s political contribution, π _d,lo is the domestic firm’s gross profit (i.e. profit including the political contribution), CS is domestic consumer surplus and T is the tariff revenue.^[14] We assume α > 2 to ensure that both firms produce positive outputs irrespective of licensing.^[15]

Following Grossman and Helpman (1994), we consider feasible and coalition-proof truthful political contribution by the domestic firm, implying that the domestic firm’s political contribution is non-negative and can’t be more than its profit, and it satisfies the following two conditions:

where (L* + αW*) is the maximum value of (L + αW) with respect to t and α W ̂ is the maximum value of αW with respect to t (i.e. when the domestic firm does not lobby and the government determines the welfare-maximising tariff).

As suggested in Grossman and Helpman (1994), condition (17) suggests that, given the political contribution of the domestic firm, the government policy must maximise the joint welfare of the domestic firm and the government, because, if that is not the case, the domestic firm can adjust its contribution to induce the government to choose the jointly optimal tariff and can appropriate some of the surplus generated from the switch in government policy.

Condition (18) suggests that to induce the government to change the policy by accepting the domestic firm’s contribution, in equilibrium, the domestic firm needs to give the government at least the same level of utility that the government could get if it did not accept the domestic firm’s contribution and determined the tariff to maximise αW.

Maximising (16) we get ∂ H ∂ t = 0 and maximising (17), we get ∂ π d , l o ∂ t − ∂ L ∂ t + ∂ H ∂ t = 0 . These two conditions give ∂ π d , l o ∂ t = ∂ L ∂ t . Hence, we determine the tariff and the contribution by maximising H subject to ∂ π d , l o ∂ t = ∂ L ∂ t and (18).

Consider the following game in this section. At stage 1, the foreign firm decides whether to license the technology. At stage 2, the domestic firm decides whether to accept the licensing contract. The domestic firm accepts the licensing contract if it is not worse off compared to the situation with no licensing. At stage 3, the domestic firm decides on the political contribution. At stage 4, the domestic government determines the tariff on the foreign firm’s output. At stage 5, the firms compete like Cournot duopolists and the profits are realised. We solve the above game through backward induction.

First consider the case under no licensing. If there is no licensing, at stage 5, given the political contribution and the tariff rate, firms D and F maximise the following expressions to determine the respective outputs:

We get the equilibrium outputs of firms D and F under no licensing as q d , l o = a − 2 c + t 3 and q f , l o = a − 2 t + c 3 . The corresponding equilibrium profits are π d , l o = a − 2 c + t 3 2 − L and π f , l o = a − 2 t + c 3 2 .

At stage 4, the government determines the tariff rate by maximising the following expression:

subject to ∂ π d , l o ∂ t = ∂ L ∂ t .

The equilibrium tariff rate is

Given the equilibrium tariff rate, the equilibrium outputs and profits are respectively q d , l o , n * = 2 α ( 2 a − 3 c ) 9 α − 2 , q f , l o , n * = a ( α − 2 ) + c ( 2 + 3 α ) 9 α − 2 , π d , l o , n = 2 α ( 2 a − 3 c ) 9 α − 2 2 − L l o , n * and π f , l o , n = a ( α − 2 ) + c ( 2 + 3 α ) 9 α − 2 2 , where L l o , n * is derived below.

We get

The equilibrium political contribution of the domestic firm is given by L * = α ( W ̂ − W * ) , as shown in (18), where α W ̂ is the maximum value of αW with respect to t. Maximising αW with respect to t, we get the welfare-maximising tariff rate in the absence of the domestic firm’s political contribution. We find that t ̂ = a 3 maximises αW,^[16] where t ̂ = a 3 < t l o , n * = a ( 2 + 3 α ) − 4 c 9 α − 2 , and the value of αW at t ̂ = a 3 is

Hence, we get

The equilibrium industry profits under no licensing is

Now consider the case under licensing, which can be found by considering c = 0 in the above-mentioned values.

The equilibrium tariff rate and the domestic firm’s political contribution under licensing are respectively

We get the following result immediately from (22), (25), (27) and (28).

The intuition for Proposition 5 is similar to that of under Proposition 2.

The equilibrium outputs and profits under licensing are respectively q d , l o , l * = 4 a α 9 α − 2 , q f , l o , l * = a ( α − 2 ) 9 α − 2 , π d , l o = 4 a α 9 α − 2 2 − L l o , l * and π f , l o = a ( α − 2 ) 9 α − 2 2 .

The equilibrium industry profits under licensing is

Now we are in a position to consider when licensing is profitable. Due to the reason mentioned in subsection 2.1, licensing will be profitable if Ω _lo,l − Ω _lo,n > 0. We get from (26) and (29) that Ω l o , l − Ω l o , n = c 2 a ( 12 + α ( 63 α − 4 ) ) − 3 c ( 4 + α ( 4 + 45 α ) ) 9 ( 9 α − 2 ) 2 > 0 for c < 24 a − 8 a α + 126 a α 2 12 + 12 α + 135 α 2 ≡ c * , where a 2 < c * , implying that licensing is profitable for any c ∈ ( 0 , a 2 ) .

The following result is immediate from the above discussion.

Proposition 6 is different from Proposition 3. Like the previous section, which considered tariff-function formation approach, the domestic firm’s cost of lobbying (the political contribution in this situation) and the tariff rate increase also in this section, where we consider the political contribution model. However, lobbying in this section increases the incentive for licensing.

Like the previous section, lobbying creates two opposing effects also in this section compared to free trade.^[17] First, like Kabiraj and Marjit (2003), if the foreign firm faces the same tariff rate irrespective of the licensing decision, it increases the possibility of licensing by reducing the cost difference between the firms. Second, higher lobbying effort and higher tariff rate under licensing compared to no licensing tends to reduce the benefit from licensing. We find in this section that the first effect dominates the second effect and lobbying increases the possibility of licensing compared to free trade.

There is a difference between lobbying under the tariff-function formation approach, considered in the previous section, and the political contribution model, considered in this section. Under the tariff-function formation approach, the domestic firm’s lobbying effort is entirely responsible for the tariff rate. In contrast, under the political contribution model, the domestic government determines the tariff rate, which is influenced by the domestic firm’s political contribution, which needs to ensure that the domestic welfare is not lower due to lobbying (as suggested by (18)). Hence, with α > 2, i.e. α 2 > 2 α 1 3 (as mentioned in footnote 15), the tariff-function formation approach is not just a special case of the political contribution model. The difference between these approaches generates different results, viz., the tariff-function formation approach reduces the incentive for licensing, while the political contribution model increases the incentive for licensing.

4.1 The Implications of Lobbying on the Consumers

Now we want to see the implications of lobbying on the consumer surplus. Since consumer surplus is q 2 2 , it will be enough for us to compare total outputs under these situations. To show this, we consider three situations – free trade, tariff under lobbying and the welfare-maximising tariff. We have seen that licensing occurs under free trade if c < c′ and it occurs for tariff under lobbying if c < c ^max. It follows from Kabiraj and Marjit (2003) that licensing occurs under welfare-maximising tariff if c < c ^max.

It is immediate that if c < c′ and licensing occurs under all these three situations – free trade, tariff under lobbying and the welfare-maximising tariff – consumer surplus is maximum under free trade and minimum under lobbying, since there is no tariff under free trade and the tariff rate is maximum under lobbying.

Now compare the situation under “free trade and no licensing” to that of under “lobbying and licensing”, which occurs if c ∈ (c′, c ^max).^[18] The equilibrium outputs are q f t , n * = 2 a − c 3 and q l o , l * = a ( 5 α − 2 ) 9 α − 2 under “free trade and no licensing” and “lobbying and licensing” respectively. We get that

(30) q f t , n * − q l o , l * = a ( 2 + 3 α ) − c ( 9 α − 2 ) 3 ( 9 α − 2 ) ≤ > 0 f o r c ≥ < a ( 2 + 3 α ) 9 α − 2 ≡ c ′ ′ ′ ,

where c ′ ′ ′ − c max = 3 a ( α − 2 ) 2 ( 2 − 9 α ) < 0 but c ′ ′ ′ − c ′ = a ( 14 − 3 α ) 5 ( 9 α − 2 ) ≥ < f o r α ≤ > 14 3 .

Since we are considering a situation where c ∈ (c′, c ^max), we get from the above discussion that c‴ ∈ (c′, c ^max) if α < 14 3 but c‴ < c′ (i.e. below the relevant range of c ∈ (c′, c ^max)) if α > 14 3 . Hence, we can say that if α < 14 3 , q f t , n * < ( > ) q l o , l * f o r c ∈ ( c ′ ′ ′ , c max ) ( c ∈ ( c ′ , c ′ ′ ′ ) ) but if α > 14 3 , q f t , n * < q l o , l * for c ∈ ( c ′ , c max ) .

The following result is immediate from the above discussion.

Proposition 7

(a) If licensing occurs under lobbying but not under free trade, the consumers are better (worse) off under lobbying compared to free trade if either α < 14 3 and c ∈ (c‴, c ^max) or α > 14 3 and c ∈ (c′, c ^max) (if α < 14 3 and c ∈ (c′, c‴)). (b) When licensing occurs under free trade, lobbying and welfare-maximising tariff, the consumer surplus is maximum under free trade and it is minimum under lobbying.

Figure 1 shows Proposition 7(a).

Figure 1:

q f t , n * − q l o , l * for c ∈ (c′, c ^max) and α ∈ [2, 10] with a = 1

We plot in Figure 1 q f t , n * − q l o , l * for c ∈ (c′, c ^max), α ∈ [2, 10] and a = 1.^[19] The blue shaded (white) area shows that q f t , n * − q l o , l * < ( > ) 0 .

Proposition 7(a) contrasts both the result of Kabiraj and Marjit (2003) and Proposition 4 of the previous section. In contrast to Kabiraj and Marjit (2003), it shows that consumer surplus may reduce under tariff protection through lobbying compared to free trade when licensing occurs only under tariff protection. This happens if the government’s weight on welfare is relatively low. On the other hand, in contrast to Proposition 4, Proposition 7(a) shows that consumer surplus may be higher under lobbying and licensing compared to free trade, if either the government’s weight on welfare is sufficiently high or the cost difference between the firms is sufficiently large.

The reasons for the above-mentioned differences are as follows. First compare with Kabiraj and Marjit (2003). They showed that if the welfare-maximising tariff attracts licensing, it always increases consumer surplus compared to free trade with no licensing. This happens because the benefit from licensing dominates the distortion due to tariff. In our analysis, lobbying increases the tariff rate compared to the welfare-maximising tariff, thus increasing the distortion due to tariff. Further, the tariff rate under lobbying increases as α falls, i.e. as the government’s relative weight on the political contribution increases. On the other hand, a relatively lower c tends to increase the consumer surplus under free trade with no licensing. Hence, if both α and c are relatively low, consumer surplus under free trade with no licensing is higher compared to consumer surplus under lobbying and licensing.

Now compare Proposition 7(a) and Proposition 4. In Section 3, lobbying imposes tariff and also reduces the possibility of licensing compared to the free trade. Both these adverse effects of lobbying reduce consumer surplus under lobbying compared to free trade. In contrast, lobbying in this section imposes tariff but increases the possibility of licensing. This benefit from licensing can outweigh the adverse effect of tariff, and consumer surplus may be higher under lobbying compared to free trade.

5 Conclusions

It is argued that tariff protection can benefit the consumers since it helps to attract superior foreign technologies through international technology licensing. Hence, the protectionist view for tariff protection can be justified if the tariff induced international technology licensing benefits the consumers. We show in this paper that this conclusion may not hold true if the tariff rate is influenced by lobbying by the domestic firm.

In contrast to the existing literature, we show that lobbying for a tariff protection may decrease or increase technology licensing compared to free trade, depending on the way lobbying affects the tariff rate. The effects of lobbying on consumer surplus also depend on the lobbying process. Hence, how tariffs are determined – by welfare-maximising governments or through lobbying by the domestic firms – and how lobbying affects the tariff rates are important for international technology licensing and the corresponding effects on the consumers.

To show that the results of Kabiraj and Marjit (2003) can be influenced significantly if the tariff rate is influenced by the lobbying effort of the domestic firm, we consider a market structure similar to theirs. An extension of our paper will be to consider the effects of multiple domestic firms. However, this is not a trivial extension, as it will raise several new questions. The foreign firm needs to determine how many licenses to offer, in the manner studied by Sen and Tauman (2007) for licensing to multiple licensees. Since lobbying by multiple domestic firms can create a free rider problem for lobbying, there will be an issue of cooperative versus non-cooperative lobbying by the firms. These issues need a full-fledged analysis. We leave them for future research.