Delegation in Customs Union under Taste Diversity

Abstract

ABSTRACT This article investigates how diversity in consumer tastes among potential customs union (CU) members influences delegation decisions between them in the context of CU formation. The model used involves a monopolist, situated in a nonmember country, which chooses the quality of a vertically differentiated good to supply to two potential CU members. Formation of a CU can be sustained only if the monopolist chooses to serve consumers with both low and high maximum willingness to pay in the potential CU members. Delegation decision in setting common external tariff depends on the degree of taste diversity and size of population in each member.