Input Tariff in Oligopoly: Entry, heterogeneity, and demand curvature

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. * We revised this discussion paper with the new title in March 2024. This paper was previously circulated under the title "Tariffs, Vertical Oligopoly and Market Structure: Empirical Investigation."