Bargaining, Tariffs and Vertical Specialization
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.
|Date of creation:||Feb 2012|
|Contact details of provider:|| Postal: Australian School of Business Building, Sydney 2052|
Fax: +61)-2- 9313- 6337
Web page: http://www.economics.unsw.edu.au/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- David L. Hummels & Jun Ishii & Kei-Mu Yi, 1999.
"The nature and growth of vertical specialization in world trade,"
72, Federal Reserve Bank of New York.
- 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.
- Ishikawa, Jota & Spencer, Barbara J., 1999.
"Rent-shifting export subsidies with an imported intermediate product,"
Journal of International Economics,
Elsevier, vol. 48(2), pages 199-232, August.
- Jota Ishikawa & Barbara J. Spencer, 1996. "Rent-Shifting Export Subsidies with an Imported Intermediate Product," NBER Working Papers 5458, National Bureau of Economic Research, Inc.
- 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.
- 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.
- Simon P. Anderson & Régis Renault, 2001.
"Efficiency and surplus bounds in Cournot competition,"
Virginia Economics Online Papers
360, University of Virginia, Department of Economics.
- Anderson, Simon P. & Renault, Regis, 2003. "Efficiency and surplus bounds in Cournot competition," Journal of Economic Theory, Elsevier, vol. 113(2), pages 253-264, December.
- Simon P. Anderson & Regis Renault, 2001. "Effciency and surplus bounds in Cournot competition," Virginia Economics Online Papers 353, University of Virginia, Department of Economics.
- Chen, Yongmin & Ishikawa, Jota & Yu, Zhihao, 2004.
"Trade liberalization and strategic outsourcing,"
Journal of International Economics,
Elsevier, vol. 63(2), pages 419-436, July.
- Chen, Yongmin & Ishikawa, Jota & Yu, Zhihao, 2001. "Trade Liberalization and Strategic Outsourcing," Discussion Papers 2001-04, Graduate School of Economics, Hitotsubashi University.
- Yongmin Chen & Jota Ishikawa & Zhihao Yu, 2002. "Trade Liberalization and Strategic Outsourcing," Carleton Economic Papers 02-12, Carleton University, Department of Economics, revised Jul 2004.
- 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.
- Barbara Spencer, 2005.
"International outsourcing and incomplete contracts,"
Canadian Journal of Economics,
Canadian Economics Association, vol. 38(4), pages 1107-1135, November.
- Barbara J. Spencer, 2005. "International Outsourcing and Incomplete Contracts," NBER Working Papers 11418, National Bureau of Economic Research, Inc.
- Antras, Pol & Helpman, Elhanan, 2004.
3196327, Harvard University Department of Economics.
- Antràs, Pol & Helpman, Elhanan, 2004. "Global Sourcing," CEPR Discussion Papers 4170, C.E.P.R. Discussion Papers.
- Pol Antràs & Elhanan Helpman, 2003. "Global Sourcing," NBER Working Papers 10082, National Bureau of Economic Research, Inc.
- Pol Antras & Elhanan Helpman, 2003. "Global Sourcing," Harvard Institute of Economic Research Working Papers 2005, Harvard - Institute of Economic Research.
- Arnaud Costinot, 2009.
"An Elementary Theory of Comparative Advantage,"
Econometric Society, vol. 77(4), pages 1165-1192, 07.
- repec:hrv:faseco:4784029 is not listed on IDEAS
When requesting a correction, please mention this item's handle: RePEc:swe:wpaper:2012-14. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Gabriele Gratton)
If references are entirely missing, you can add them using this form.