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Trade Policy, Market Leaders and Endogenous Competition Intensity

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  • Jan Boone
  • Delia Ionascu
  • Kresimir Zigic

Abstract

It is well known that tariff policy can alleviate the negative consequences of breaching intellectual property rights by foreign firms. Yet, the positive effect of tariff protection is thought to be the benefit firms get at the expense of consumers (at least in the short run). Using a set-up in which the intensity of market competition is endogenous, we argue that consumers can benefit from tariffs even in the short run. A high level of tariff protection alters the firms’ cost efficiency distribution and induces tougher market competition. Consumers benefit from the tariff policy, and governments that assign a high enough weight to the consumer surplus set positive tariff levels. Under protection the innovation level remains the same as under free trade but the average industry efficiency increases.

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Bibliographic Info

Paper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number wp311.

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Date of creation: Oct 2006
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Handle: RePEc:cer:papers:wp311

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Related research

Keywords: Tariff protection; supergames; cost asymmetries; market conduct; leadership; consumer welfare;

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References

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  1. repec:rje:randje:v:37:y:2006:1:p:146-154 is not listed on IDEAS
  2. Jones, Ronald W. & Takemori, Shumpei, 1989. "Foreign monopoly and optimal tariffs for the small open economy," European Economic Review, Elsevier, Elsevier, vol. 33(9), pages 1691-1707, December.
  3. Helder Vasconcelos, 2005. "Tacit Collusion, Cost Asymmetries, and Mergers," RAND Journal of Economics, The RAND Corporation, vol. 36(1), pages 39-62, Spring.
  4. Jordi Gual & Anne Perrot & Michele Polo & Patrick Rey & Klaus Schmidt & Rune Stenbacka, 2006. "An Economic Approach to Article 82," CPI Journal, Competition Policy International, Competition Policy International, vol. 2.
  5. Compte, Olivier & Jenny, Frederic & Rey, Patrick, 2002. "Capacity constraints, mergers and collusion," European Economic Review, Elsevier, Elsevier, vol. 46(1), pages 1-29, January.
  6. Raymond Deneckere & Dan Kovenock, 1988. "Price Leadership," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 773, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Kabiraj, Tarun & Marjit, Sugata, 2003. "Protecting consumers through protection: The role of tariff-induced technology transfer," European Economic Review, Elsevier, Elsevier, vol. 47(1), pages 113-124, February.
  8. Federico Etro, 2006. "Aggressive leaders," RAND Journal of Economics, RAND Corporation, RAND Corporation, vol. 37(1), pages 146-154, 03.
  9. Dixit, Avinash, 1988. "Anti-dumping and countervailing duties under oligopoly," European Economic Review, Elsevier, Elsevier, vol. 32(1), pages 55-68, January.
  10. Kirman, Alan & Schueller, Nathalie, 1990. "Price Leadership and Discrimination in the European Car Market," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 39(1), pages 69-91, September.
  11. Motta, Massimo, 1992. "Multinational firms and the tariff-jumping argument : A game theoretic analysis with some unconventional conclusions," European Economic Review, Elsevier, Elsevier, vol. 36(8), pages 1557-1571, December.
  12. Rothschild, R., 1999. "Cartel stability when costs are heterogeneous," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 17(5), pages 717-734, July.
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Cited by:
  1. Federico Etro, 2011. "Endogenous Market Structures And Strategic Trade Policy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(1), pages 63-84, 02.
  2. Federico Etro, 2006. "Market Leaders and Industrial Policy," Working Papers, University of Milano-Bicocca, Department of Economics 103, University of Milano-Bicocca, Department of Economics, revised Nov 2006.

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