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Bargaining, Tariffs and Vertical Specialization

Author

Listed:
  • 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.

Suggested Citation

  • Tomohiro Ara & Arghya Ghosh, 2012. "Bargaining, Tariffs and Vertical Specialization," Discussion Papers 2012-14, School of Economics, The University of New South Wales.
  • Handle: RePEc:swe:wpaper:2012-14
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    File URL: http://research.economics.unsw.edu.au/RePEc/papers/2012-14.pdf
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    References listed on IDEAS

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    5. 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.
    6. repec:hrv:faseco:4784029 is not listed on IDEAS
    7. 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.
    8. Barbara Spencer, 2005. "International outsourcing and incomplete contracts," Canadian Journal of Economics, Canadian Economics Association, vol. 38(4), pages 1107-1135, November.
    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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    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

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

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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