Strategic Trade Policy When Domestic Firms Compete Against Vertically Integrated Rivals / Dani Rodrik, Chang-Ho Yoon.

Format:

Book

Author/Creator:

Rodrik, Dani.

Contributor:

National Bureau of Economic Research.

Yoon, Chang-Ho.

Series:

Working Paper Series (National Bureau of Economic Research) no. w2916.

NBER working paper series no. w2916

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1989.

Summary:

This paper models the international competition between a domestic firm and its vertically integrated foreign rival. The domestic firm has the choice of developing its own production capability for an intermediate input, or of importing it from the foreign firm at a price set by the latter. In this setting, and under reasonable cost assumptions, the foreign firm will always choose to supply the domestic firm as long as it cannot monopolize the final-good market by withholding supply. A tariff placed on the imports of the input by the home government will be borne entirely by the foreign firm, and will be welfare increasing. When the home government chooses to subsidize the domestic firm's fixed development costs for the input, the optimal subsidy will exceed the total fixed costs required, but will not have to be disbursed in equilibrium. A tariff on the final good will enhance the home firm's profits not only by increasing the costs of its rival, but also by reducing its own input costs.

Notes:

Print version record

April 1989.