Welfare-reducing optimal tariff in vertically related markets

Kazuhiro Takauchi and Tomomichi Mizuno

No 2502, Discussion Papers from Graduate School of Economics, Kobe University

Abstract: Tougher competition in an upstream market lowers the input price, production cost of downstream firms, and vertical inefficiency; hence, it is likely to raise the welfares of the final-good importer. However, if the final-good importer sets an optimal tariff on the final good, a happy ending may not occur. We show that if more than one firm exists upstream of the final-good importer, because tougher competition in upstream price competition raises the tariff of the final-good importer and dominates the lowering effect of the input price, the consumer and total surpluses of the final-good importer fall.

Pages: 23 pages
Date: 2025-01
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