Abstract:
This paper deals with the issue of delegation between potential
member countries while forming a Customs Union (CU) under a vertically
differentiated monopoly in a three country world. Under universal market
coverage, CU formation can be sustained with both the member countries
preferring CU over setting tariff unilaterally and non-cooperatively but
differing in the choice of the member being delegated the tariff-setting
power. However, if the country with smaller relative taste diversity is
smaller in size, then CU formation can’t be sustained as a unique NE
since both will prefer to set tariffs unilaterally and non-cooperatively
over delegating the tariff-setting power and form a CU.