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Bargaining, Tariffs and Vertical Specialization

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  • Tomohiro Ara

    ()
    (School of Economics, The University of New South Wales)

  • Arghya Ghosh

    ()
    (School of Economics, The University of New South Wales)

Abstract

How does the bargaining power of firms affect trade policy? We address this question in an international, bilateral oligopoly setting where the Home country specializes in final goods and the Foreign country specializes in intermediate inputs. A matched Home-Foreign pair bargains simultaneously over the input price and the level of output, and competes with other matched pairs in markets. In such environments with vertical specialization, we show that the welfare-maximizing Home tariff rate strictly decreases as the bargaining power of Home firms increases. Surprisingly, we find that an increase in Home bargaining power can also raises Foreign profits. These results hold for fairly general demand function and a number of different procurement mechanisms. In an endogenous market structure setting with free entry and matching, the relationship between the tariff and bargaining power is usually non-monotone. In particular, the relationship is U-shaped (resp. inverted U-shaped) if the demand function is strictly concave (resp. convex). If the demand function is linear, free trade is optimal (i.e., optimal tariff is zero) irrespective of the bargaining power. The relationship between welfare and bargaining power is also explored.

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File URL: http://research.economics.unsw.edu.au/RePEc/papers/2012-14.pdf
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Bibliographic Info

Paper provided by School of Economics, The University of New South Wales in its series Discussion Papers with number 2012-14.

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Length: 33 pages
Date of creation: Feb 2012
Date of revision:
Handle: RePEc:swe:wpaper:2012-14

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Related research

Keywords: Tariffs; Oligopoly; Outsourcing; Bargaining Power; Free Entry.;

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  1. Ishikawa, Jota & Lee, Ki-Dong, 1997. "Backfiring tariffs in vertically related markets," Journal of International Economics, Elsevier, vol. 42(3-4), pages 395-423, May.
  2. Antràs, Pol & Helpman, Elhanan, 2004. "Global Sourcing," CEPR Discussion Papers 4170, C.E.P.R. Discussion Papers.
  3. Hummels, David & Ishii, Jun & Yi, Kei-Mu, 2001. "The nature and growth of vertical specialization in world trade," Journal of International Economics, Elsevier, vol. 54(1), pages 75-96, June.
  4. Simon P. Anderson & Regis Renault, 2001. "Effciency and surplus bounds in Cournot competition," Virginia Economics Online Papers 353, University of Virginia, Department of Economics.
  5. Chen, Yongmin & Ishikawa, Jota & Yu, Zhihao, 2004. "Trade liberalization and strategic outsourcing," Journal of International Economics, Elsevier, vol. 63(2), pages 419-436, July.
  6. Arnaud Costinot, 2009. "An Elementary Theory of Comparative Advantage," NBER Working Papers 14645, National Bureau of Economic Research, Inc.
  7. repec:hrv:faseco:4784029 is not listed on IDEAS
  8. Ornelas, Emanuel & Turner, John L., 2008. "Trade liberalization, outsourcing, and the hold-up problem," Journal of International Economics, Elsevier, vol. 74(1), pages 225-241, January.
  9. Simon GB Cowan & Simon Cowan, 2004. "The welfare effects of third-degree price discrimination," Economics Series Working Papers 205, University of Oxford, Department of Economics.
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