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Strategic Trade Policy When Domestic Firms Compete Against Vertically Integrated Rivals

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  • Dani Rodrik
  • Chang-Ho Yoon

Abstract

This paper models the international competition between a domestic firm and its vertically integrated foreign rival. The domestic firm has the choice of developing its own production capability for an intermediate input, or of importing it from the foreign firm at a price set by the latter. In this setting, and under reasonable cost assumptions, the foreign firm will always choose to supply the domestic firm as long as it cannot monopolize the final-good market by withholding supply. A tariff placed on the imports of the input by the home government will be borne entirely by the foreign firm, and will be welfare increasing. When the home government chooses to subsidize the domestic firm's fixed development costs for the input, the optimal subsidy will exceed the total fixed costs required, but will not have to be disbursed in equilibrium. A tariff on the final good will enhance the home firm's profits not only by increasing the costs of its rival, but also by reducing its own input costs.

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File URL: http://www.nber.org/papers/w2916.pdf
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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2916.

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Date of creation: Apr 1989
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Publication status: published as "Strategic Trade Policy with Potential for Import Substitution," Journal of Economic Development, Vol. 20, #1, 1995.
Handle: RePEc:nbr:nberwo:2916

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  1. Katz, Michael L, 1987. "The Welfare Effects of Third-Degree Price Discrimination in," American Economic Review, American Economic Association, vol. 77(1), pages 154-67, March.
  2. Mallela, Parthasaradhi & Nahata, Babu, 1980. "Theory of Vertical Control with Variable Proportions," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 1009-25, October.
  3. Salinger, Michael A, 1988. "Vertical Mergers and Market Foreclosure," The Quarterly Journal of Economics, MIT Press, vol. 103(2), pages 345-56, May.
  4. Jones, R.W. & Spencer, B.J., 1989. "Vertical Foreclosure And International Trade Policy," RCER Working Papers 194, University of Rochester - Center for Economic Research (RCER).
  5. Vernon, John M & Graham, Daniel A, 1971. "Profitability of Monopolization by Vertical Integration," Journal of Political Economy, University of Chicago Press, vol. 79(4), pages 924-25, July-Aug..
  6. James A. Brander & Barbara J. Spencer, 1980. "Tariffs and the Extraction of Foreign Monopoly Rents under Potential Entry," Working Papers 414, Queen's University, Department of Economics.
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Cited by:
  1. Karp, Larry & Sioli, Lucy, 1995. "Vertically Related Markets and Trade Policy in a Bargaining Framework," CEPR Discussion Papers 1175, C.E.P.R. Discussion Papers.
  2. Susan E. Skeath, 1993. "Input tariffs as a way to deal with dumping," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 45-55.
  3. Jie-A-Joen,Clive & Belderbos,René & Sleuwaegen,Leo, 1998. "Local content requirements, vertical cooperation, and foreign direct investment," Research Memorandum 001, Maastricht University, Netherlands Institute of Business Organization and Strategy Research (NIBOR).
  4. Bernhofen, Daniel M., 1995. "Price dumping in intermediate good markets," Journal of International Economics, Elsevier, vol. 39(1-2), pages 159-173, August.

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