Quota-induced cycles

We present a new framework to compare the dynamic effect of tariffs and quo tas in the presence of oligopoly. Suppose that the domestic and the foreign firm play a quantity-setting game over time in a perfectly stationary econ omy. A Markov-perfect equilibrium has the foreign firm exporting at the con stant rate under a tariff. In contrast, under the quota the rate of exports changes monotonically over the course of each year, causing seasonal fluct uations in domestic production. Quota-induced cycles can make dynamic marke t segmentation possible and raise profits for both the firms above what the y earn under the equal-import tariff.