Tariff Revenue Competition in a Free Trade Area: The Case of Asymmetric Large Countries

Taiji Furusawa and Naoto Jinji

Review of Development Economics, 2007, vol. 11, issue 2, 300-312

Abstract: The striking result has been shown by Richardson that tariff revenue competition between two symmetric member countries of a free trade area (FTA) results in complete elimination of external tariffs if there exists a pure‐strategy Nash equilibrium at all. Richardson also conjectures without building a model that if member countries are asymmetric in market size, there exists a pure‐strategy Nash equilibrium in which both countries set positive external tariffs. We explicitly extend his tariff competition model into the case of asymmetric FTA member countries, and confirm his conjecture. We also show that there exists a mixed‐strategy Nash equilibrium in the case of symmetric countries.

Date: 2007
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