The impacts of tariffs on the foreign firm’s product line extension and supply chain profit

Over the past decade, manufacturing has been relocated to developing countries. In such cases, import tariffs are raised, and consumers tend to value locally made products more. Since local products are limited, foreign firms can increase their market share by extending their product lines. However, it remains unclear how different product line extensions, such as high-end and low-end products, affect supply chain profits. To explore this issue, we analyze the tariff rate difference between high-end and low-end products, as well as foreign firms’ product line extensions under a global supply chain strategy. Our study focuses on three global supply chain strategies: foreign firms selling both low-and high-end products through local dealers, high-end product line extensions, and low-end product line extensions. Additionally, foreign firms and local dealers invest in services for both low- and high-end products to remain competitive on the market. When foreign firms and local dealers add high-end products to their product lines, profits increase. Interestingly, any product line extension strategy generates higher sales than no product line extension. However, when foreign firms extend their product lines with low-end products, supply chain profits and local dealer profits decrease compared to high-end product extensions. Moreover, all three import business strategies result in lower consumer surplus than no product line extension.