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Trade and Protection in Vertically Related Markets

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  • Barbara J. Spencer
  • Ronald W. Jones

Abstract

A domestic firm is partially dependent on a foreign vertically integrated supplier for a key intermediate product when both firms are Cournot competitors in the market for the final product. The foreign supplier generally charges its domestic rival a price for the input that exceeds the independent monopoly level and vertical foreclosure may occur. Domestic policies applied to the vertically related products can increase domestic welfare by reducing the price and increasing the availability of imported supplies of the input. Vertical integration in the foreign supplier has significant implications for all three domestic policies considered: a tariff or subsidy on imports of both products and a domestic production subsidy. The foreign vertically integrated firm tends to reduce its price for the input in response to an import tariff on the final product, whereas a simple monopoly supplier would respond by increasing its export price. Also domestic cost conditions for the production of the input can critically affect the desirability of a tax as apposed to a subsidy on intermediate imports.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3023.

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Date of creation: Jul 1989
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Publication status: published as Journal of International Economics, Vol. 32, pp.31-55, 1992
Handle: RePEc:nbr:nberwo:3023

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  1. Sanyal, Kalyan K & Jones, Ronald W, 1982. "The Theory of Trade in Middle Products," American Economic Review, American Economic Association, vol. 72(1), pages 16-31, March.
  2. James A. Brander & Barbara J. Spencer, 1981. "Tariffs and the Extraction of Foreign Monopoly Rents under Potential Entry," Canadian Journal of Economics, Canadian Economics Association, vol. 14(3), pages 371-89, August.
  3. Dixit, Avinash, 1984. "International Trade Policy for Oligopolistic Industries," Economic Journal, Royal Economic Society, vol. 94(376a), pages 1-16, Supplemen.
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