Year: 2005
Title:
CAN A TARIFF ON FOREIGN COMPETITION HARM THE DOMESTIC INDUSTRY?
JEL: F12, F13
Authors:
Stefan Lutz, University of Manchester
Abstract:
The answer to the question in the title is yes for the case of an ad-valorem tariff, a foreign industry that produces a vertically differentiated good of higher quality, and costs that take the form of quality-dependent fixed costs for both the foreign and domestic firm. The domestic industry loses profits due to the foreign industry's lowering of product quality which intensifies price competition. This result carries through to the case of additional constant marginal costs, if this cost component does not increase too fast with increases in product quality produced. However, it does not hold with quality-dependent marginal costs. In this latter case, the foreign firm will reduce output rather than quality, which tends to reduce foreign competition.
Keywords:
trade, tariffs, vertical product differentiation, quality-dependent costs
Contact address: stefan.lutz at manchester.ac.uk
Paper URL: http://www.socialsciences.man.ac.uk/economics/utils/logs/ses.asp?info=noinfo&page=/economics/research/discussion_paper_0510.pdf
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