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Can taxing foreign competition harm the domestic industry?

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  • Lutz, Stefan

Abstract

The answer to the question in the title is yes for the case of ad-valorem taxes, a foreign industry that produces a vertically differentiated good of higher quality, and costs that take the form of qualitydependent fixed costs for both the foreign and domestic firm. The domestic industry loses profits due to the foreign industry's lowering of product quality which intensifies price competition. This result carries through to the case of additional constant marginal costs, if this cost component does not increase too fast with increases in product quality produced. However, it does not hold with qualitydependent marginal costs. In this latter case, the foreign firm will reduce output rather than quality, which tends to reduce foreign competition.

Suggested Citation

  • Lutz, Stefan, 1998. "Can taxing foreign competition harm the domestic industry?," ZEI Working Papers B 15-1998, University of Bonn, ZEI - Center for European Integration Studies.
  • Handle: RePEc:zbw:zeiwps:b151998
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    Cited by:

    1. Lutz, Stefan H., 2002. "The Effects of Quotas on Vertical Intra-Industry Trade," ZEW Discussion Papers 02-61, ZEW - Leibniz Centre for European Economic Research.
    2. repec:kap:iaecre:v:11:y:2005:i:2:p:163-173 is not listed on IDEAS
    3. S Lutz, 2005. "Can a Tariff on Foreign Competition Harm the Domestic Industry?," The School of Economics Discussion Paper Series 0510, Economics, The University of Manchester.
    4. Stefan Lutz, 2005. "The Effect of Quotas on Domestic Product Price and Quality," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 11(2), pages 163-173, May.

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    More about this item

    Keywords

    trade; tariffs; vertical product differentiation; quality-dependent costs;
    All these keywords.

    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
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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