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Can taxing foreign competition harm the domestic industry?

  • Lutz, Stefan

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.

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Paper provided by ZEI - Center for European Integration Studies, University of Bonn in its series ZEI Working Papers with number B 15-1998.

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Date of creation: 1998
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Handle: RePEc:zbw:zeiwps:b151998
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  1. Cremer, Helmuth & Thisse, Jacques-François, 1993. "Commodity Taxation in a Differentiated Oligopoly," IDEI Working Papers 25, Institut d'Économie Industrielle (IDEI), Toulouse.
  2. Andreas IRMEN & Jean-François THISSE, 1996. "Competition in Multi-Characteristics Spaces: Hotelling Was Almost Right," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9613, Université de Lausanne, Faculté des HEC, DEEP.
  3. James Levinsohn, 1988. "Empirics of Taxes on Differentiated Products: The Case of Tariffs in the U.S. Automobile Industry," NBER Chapters, in: Trade Policy Issues and Empirical Analysis, pages 9-44 National Bureau of Economic Research, Inc.
  4. Uri Ronnen, 1991. "Minimum Quality Standards, Fixed Costs, and Competition," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 490-504, Winter.
  5. Kala Krishna, 1985. "Trade Restrictions as Facilitating Practices," NBER Working Papers 1546, National Bureau of Economic Research, Inc.
  6. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
  7. Boom, Anette, 1995. "Asymmetric International Minimum Quality Standards and Vertical Differentiation," Journal of Industrial Economics, Wiley Blackwell, vol. 43(1), pages 101-19, March.
  8. Crampes, C. & Hollander, A., 1991. "Duopoly and Quality Standards," Cahiers de recherche 9128, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  9. James Brander & Paul Krugman, 1982. "A 'Reciprocal Dumping' Model of International Trade," Working Papers 513, Queen's University, Department of Economics.
  10. GABSZEWICZ, Jean J. & THISSE, Jacques-François, . "Price competition, quality and income disparities," CORE Discussion Papers RP -370, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  11. Goldberg, Penny Koujianou, 1994. "Trade policies in the U.S. automobile industry," Japan and the World Economy, Elsevier, vol. 6(2), pages 175-208, June.
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