Tariffs on Input Trade Margins under Vertical Oligopoly:Theory and Evidence

Tomohiro Ara, Arpita Chatterjee, Arghya Ghosh and Hongyong Zhang

No 46, TUPD Discussion Papers from Graduate School of Economics and Management, Tohoku University

Abstract: What is the effect of tariffs on the input trade margins when vertically related markets are oligopolistic? To address the question, this paper develops a vertical oligopoly model in which one country specializes in producing a final good while another country specializes in producing an intermediate good by taking into account strategic interactions among firms. We find that, for constant-elasticity demand, a tariff reduction increases the number of trading firms (extensive margin) and average trade value per firm (intensive margin) in the vertically related sectors, raising the intensive margin relative to the extensive margin. To assess the empirical relevance of our theoretical results, we focus on China's WTO accession which was a large policy change to Chinese firms. We find that a tariff reduction significantcantly increases both margins in the post-WTO period, though the effect on the extensive margin is much smaller than that on the intensive margin.

Pages: 33 pages
Date: 2024-02
New Economics Papers: this item is included in nep-cna, nep-com, nep-ind and nep-int
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http://hdl.handle.net/10097/0002000766

Related works:
Working Paper: Tariffs on Input Trade Margins under Vertical Oligopoly: Theory and evidence (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:toh:tupdaa:46

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