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Upstream Pricing Schemes, Trade Liberalization, Trade and Environmental Policies of Downstream Countries

Bo Li (), Fei Xing () and Mark Yu ()
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Bo Li: School of Economics and Environmental Resources, Hubei University of Economics, 8 Yangqiaohu Avenue, Wuhan 430205, China
Fei Xing: School of Economics, Huazhong University of Science and Technology, 1037 Luoyu Road, Wuhan 430074, China
Mark Yu: Department of Agriculture & Consumer Science, Tarleton State University, 1333 W Washington Street, Stephenville, TX 76401, USA

Sustainability, 2018, vol. 10, issue 7, 1-13

Abstract: Trade liberalization has a significant impact on the environment and social welfare of countries. In the real world, almost all industries exist upstream and downstream firms but the existing literature on the impact of trade liberalization rarely discuss the interaction between upstream and downstream firms. The goal of this study is to analyze the effects of trade liberalization on the trade policies, environmental policies and social welfare of downstream exporting countries when different pricing schemes (uniform pricing vs. discriminatory pricing) are implemented by upstream monopoly firms. By constructing a three-stage dynamic game model we found that, regardless of pricing schemes, trade liberalization leads to increase both environmental taxes and import taxes. Trade liberalization increases the social welfare of downstream countries under discriminatory pricing, while trade liberalization first reduces and then increases the social welfare of downstream countries under uniform pricing. The results indicate that the downstream countries always have the incentive to participate in trade agreements that integrate markets when discriminatory pricing schemes will be implemented by upstream firms. This finding is the most significant contribution of this paper which has not been addressed in the previous literature.

Keywords: discriminatory pricing; uniform pricing; trade liberalization; trade policy; environmental policy (search for similar items in EconPapers)
JEL-codes: Q Q0 Q2 Q3 Q5 Q56 O13 (search for similar items in EconPapers)
Date: 2018
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