TITLE Tariffs on Input Trade Margins under Vertical Oligopoly: Theory and Evidence
AUTHORS Tomohiro Ara

Associate Professor, Faculty of Economics and Business Admin Fukushima University
Associate Professor, Research Center for Policy Design, Tohoku University

Arpita Chatterjee

Indian Institute of Management
Associate Professor, UNSW Business School

Arghya Ghosh

Professor, UNSW Business School

Hongyong Zhang

Fellow, Research Institute of Economy, Trade and Industry

PUBLISHED IN RIETI Discussion Paper Series 17-E-025

How does an increase in tariff on intermediate input affect different margins of trade and what in turn are consequences for optimal tariff? We address this question in a setting with vertical specialization where oligopolistic, downstream Home firms procure input from perfectly competitive, Foreign upstream firms. Our key focus is to understand how Home optimal tariff departs from the competitive benchmark (inverse of foreign export supply elasticity). While underproduction in oligopoly puts a downward pressure on tariff, welfare improvement arising from rationalization (in presence of entry) and possible reallocation (in presence of cost heterogeneity) can put an upward pressure on tariff. Hence, in general, optimal tariff can be higher or lower than the competitive benchmark.

KEYWORDS Optimal tariff, input trade, oligopoly, free entry, cost heterogeneity
POSTED March 2024

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