Trade Policy and Access to Retail Distribution

This paper develops a model in which foreign and domestic manufacturers producing differentiated goods sell through spatially differentiated retailers. There is free entry into retailing but access to the retail distribution network (entry into manufacturing) is controlled. We compare the use of tariffs on imports and direct controls of foreign manufacturing entry as means of increasing domestic welfare. It is shown that, in one special case of the model, foreign entry is always welfare-improving when tariffs can be used. When trade policy is not available, however, a little entry is welfare-reducing whereas a lot of entry is welfare-improving; it is noted that this property holds in other settings. Finally, simulations of the full model show that foreign entry may always be welfare-improving even with no tariffs, through its effects on the retail equilibrium. In particular, by increasing the range of products available it brings more consumers into the market and so makes retailing more profitable. This stimulates entry into retailing thus reducing the transport costs faced by consumers. We also discuss the choice of tariff in this setting and note that it increases with domestic entry. As the number of domestic firms increases, ceteris paribus, overall profits are declining but the domestic share is increasing as the foreign share declines. Accordingly, the profit-shifting role of a tariff is increasingly significant as its consequences for consumer prices declines.