Trade Warfare: Tariffs and Cartels

James Brander and Barbara Spencer

No 1193, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: National governments have incentives to intervene in international markets, particularly in encouraging export cartels and in imposing tariffs on imports from imperfectly competitive foreign firms. Although the optimal response to foreign monopoly is usually a tariff, a specific subsidy will be optimal if demand is very convex, as with constant elasticity demand. If ad valorem tariffs or subsidies are considered, a subsidy is optimal if the elasticity of demand increases as consumption increases.The critical conditions in both ad valorern and specific cases hold generally for Cournot ologopoly. Noncooperative international policy equilibrium will be characterized by export cartels and rent-extracting tariffs.

Date: 1983-08
Note: ITI IFM
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Published as Brander, James A. and Barbara J. Spencer. "Trade Warfare: Tariffs and Cartels." Journal of International Economics, Vol. 16, No. 3, (May 1984), pp. 227-242.

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