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Vertically Related Markets and Trade Policy in a Bargaining Framework


  • Karp, Larry
  • Sioli, Lucy


We analyse the interaction of asymmetric industries in international vertically related markets. Each downstream firm bargains efficiently with its domestic supplier in a first stage and with the foreign supplier in a second stage. The asymmetry in upstream costs leads to inter-industry trade. It can also cause vertical integration in the more efficient industry, and possibly vertical foreclosure. The latter occurs if competition in the final goods market is severe (the goods are close substitutes). When the more efficient industry is integrated, a tariff on imports of the final good stimulates inter-industry trade of the input, but it may increase or decrease the market share of the domestic upstream firm. The effects of a tariff depend on the industry configuration in the low-cost country.

Suggested Citation

  • 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.
  • Handle: RePEc:cpr:ceprdp:1175

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    References listed on IDEAS

    1. Henrick Horn & Asher Wolinsky, 1988. "Bilateral Monopolies and Incentives for Merger," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 408-419, Autumn.
    2. Hart, O. & Tirole, J., 1990. "Vertical Integration And Market Foreclosure," Working papers 548, Massachusetts Institute of Technology (MIT), Department of Economics.
    3. Patrick Bolton & Michael D. Whinston, 1993. "Incomplete Contracts, Vertical Integration, and Supply Assurance," Review of Economic Studies, Oxford University Press, vol. 60(1), pages 121-148.
    4. Dixit, Avinash K, 1986. "Comparative Statics for Oligopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 107-122, February.
    5. Dani Rodrik & Chang-Ho Yoon, 1989. "Strategic Trade Policy When Domestic Firms Compete Against Vertically Integrated Rivals," NBER Working Papers 2916, National Bureau of Economic Research, Inc.
    6. Ordover, Janusz A & Saloner, Garth & Salop, Steven C, 1990. "Equilibrium Vertical Foreclosure," American Economic Review, American Economic Association, vol. 80(1), pages 127-142, March.
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    More about this item


    Cooperative Games; Multistage Bargaining; Strategic Trade Policy; Vertical Integration;

    JEL classification:

    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure


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