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Bargaining, Tariffs and Vertical Specialization

  • Tomohiro Ara


    (School of Economics, The University of New South Wales)

  • Arghya Ghosh


    (School of Economics, The University of New South Wales)

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.

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Paper provided by School of Economics, The University of New South Wales in its series Discussion Papers with number 2012-14.

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Length: 33 pages
Date of creation: Feb 2012
Date of revision:
Handle: RePEc:swe:wpaper:2012-14
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  1. Pol Antràs & Elhanan Helpman, 2003. "Global Sourcing," NBER Working Papers 10082, National Bureau of Economic Research, Inc.
  2. 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.
  3. Simon P. Anderson & Regis Renault, 2001. "Effciency and surplus bounds in Cournot competition," Virginia Economics Online Papers 353, University of Virginia, Department of Economics.
  4. David Hummels & Jun Ishii & Kei-Mu Yi, 1999. "The nature and growth of vertical specialization in world trade," Staff Reports 72, Federal Reserve Bank of New York.
  5. Arnaud Costinot, 2009. "An Elementary Theory of Comparative Advantage," Econometrica, Econometric Society, vol. 77(4), pages 1165-1192, 07.
  6. 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.
  7. repec:hrv:faseco:4784029 is not listed on IDEAS
  8. Barbara Spencer, 2005. "International outsourcing and incomplete contracts," Canadian Journal of Economics, Canadian Economics Association, vol. 38(4), pages 1107-1135, November.
  9. Chen, Yongmin & Ishikawa, Jota & Yu, Zhihao, 2004. "Trade liberalization and strategic outsourcing," Journal of International Economics, Elsevier, vol. 63(2), pages 419-436, July.
  10. 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.
  11. 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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