TARIFFS FOR A FOREIGN MONOPOLIST UNDER INCOMPLETE INFORMATION

When the domestic government is better informed about demand in the domestic market than a foreign monopolist that exports to the domestic market, the domestic government can use its tariff to signal about demand. In the signalling equilibrium, the domestic government uses a tariff which is larger than the optimal tariff under complete information. However, it is possible that welfare in the signalling equilibrium is lower than welfare when the domestic government is uncertain about demand. The domestic government can avoid the cost of signalling by delegating tariff-setting to a revenue-maximising agent.