Optimal trade policies under product differentiations
Abstract
This article focuses on the optimal international trade policy considered product differentiations. A duopoly model with a home firm in a developing country and a foreign firm in a developed country is established. The findings indicate that, the optimal tariff relies on the product differentiations significantly. On one hand, higher marginal cost of home firms have opposite effects on optimal tariff compared to higher marginal cost of foreign firms. On the other hand, the optimal tariff is monotonically decreasing in the amount of consumers caring about brands and increasing in the scale of consumers not caring about brands. Moreover, an increase in the marginal cost and transportation cost of imported goods triggers price rising in domestic market as the market power of home firms is consolidated. In addition, a foreign firm may withdraw from domestic market if its competitive advantages vanishes under high tariffs.
Keyword : product differentiations, tariff, trade policies, brand, duopoly model, consumer preference, market power
How to Cite
Yang, Y.- cong ., & Nie, P.- yan . (2020). Optimal trade policies under product differentiations. Journal of Business Economics and Management, 21(1), 241-254. https://doi.org/10.3846/jbem.2020.11923
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Amador, M., & Bagwell, K. (2012). Tariff revenue and tariff caps. American Economic Review, 102(3), 459–465. https://doi.org/10.1257/aer.102.3.459
Customs Tariff Commission of the China State Council. (2018). Announcement of the Customs Tariff Commission of the China State Council on reducing import tariffs on vehicles and parts. http://www.gov.cn/xinwen/2018-05/22/content_5292720.htm
Baldwin, R. E., & Robert-Nicoud, F. (2008). Trade and growth with heterogeneous firms. Journal of International Economics, 74(1), 21–34. https://doi.org/10.1016/j.jinteco.2007.05.004
Bhattacharjea, A. (1995). Strategic tariffs and endogenous market structure: Trade and industrial policies under imperfect competition. Journal of Development Economics, 47, 287–312. https://doi.org/10.1016/0304-3878(95)00014-h
Bouët, A., & Cassagnard, P. (2013). Strategic trade policy under asymmetric information with screening. Economic Modelling, 32, 286–293. https://doi.org/10.1016/j.econmod.2013.02.024
Chen, Y. H., Chen, M. X., & Mishra, A. K. (2019). Subsidies under uncertainty: Modeling of input- and output-oriented policies. Economic Modelling, 85, 39–56. https://doi.org/10.1016/j.econmod.2019.05.005
Chen, Y. H., Nie, P. Y., & Wang, X. H. (2015). Asymmetric duopoly competition with innovation spillover and input constraints. Journal of Business Economics and Management, 16(6), 1124–1139. https://doi.org/10.3846/16111699.2013.823104
Coşar, A. K., & Demir, B. (2016). Domestic road infrastructure and international trade: evidence from Turkey. Journal of Development Economics, 118, 232–244. https://doi.org/10.1016/j.jdeveco.2015.10.001
CNN. (2019). CNN Business Report. https://edition.cnn.com/2019/05/10/economy/china-tariffs-goods-expensive/index.html
Dixit, A. (1984). International trade policy for oligopolistic industries. The Economic Journal, 94(Suppl), 1–16. https://doi.org/10.2307/2232651
Eaton, J., & Grossman, G. M. (1986). Optimal trade and industrial policy under oligopoly. The Quarterly Journal of Economics, 101(2): 383–406. https://doi.org/10.2307/1891121
Eichengreen, B. (2019). Trade policy and the macroeconomy. IMF Economic Review, 67(1), 4–23. https://doi.org/10.1057/s41308-018-0053-9
Etro, F. (2014). Optimal trade policy under endogenous foreign entry. Economic Record, 90(290), 282– 300. https://doi.org/10.1111/1475-4932.12108
Feng, L., Li, Z., & Swenson, D. L. (2017). Trade policy uncertainty and exports: evidence from China’s WTO accession. Journal of International Economics, 106, 20–36. https://doi.org/10.1016/j.jinteco.2016.12.009
Goh, A. T. (2000). Opportunity cost, trade policies and the efficiency of firms. Journal of Development Economics, 62, 363–383. https://doi.org/10.1016/s0304-3878(00)00089-4
Häckner, J., & Herzing, M. (2016). Welfare effects of taxation in oligopolistic markets. Journal of Economic Theory, 163, 141–166. https://doi.org/10.1016/j.jet.2016.01.007
Harry, G. J. (1953). Optimum tariffs and retaliation. Review of Economic Studies, 21(2), 142–153. https://doi.org/10.2307/2296006
Hye, Q. M. A., & Lau, W. Y. (2015). Trade openness and economic growth: Empirical evidence from India. Journal of Business Economics & Management, 16(1), 188–205. https://doi.org/10.3846/16111699.2012.720587
Hwang, H., Lin, Y. S., & Yang, Y. P. (2007). Optimal trade policies and production technology in vertically related markets. Review of International Economics, 15(4), 823–835. https://doi.org/10.1111/j.1467-9396.2007.00669.x
Yang, Y. C., Nie, P. Y., Liu, H. T, & Shen, M. H. (2018). On the welfare effects of subsidy game for renewable energy investment: Toward a dynamic equilibrium model. Renewable Energy, 121, 420–428. https://doi.org/10.1016/j.renene.2017.12.097
Kohl, T., Brakman, S., & Garretsen, H. (2016). Do trade agreements stimulate international trade differently? Evidence from 296 trade agreements. World Economy, 39(1), 97–131. https://doi.org/10.1111/twec.12272
Krugman, P. R. (1979). Increasing returns, monopolistic competition, and international trade. Journal of International Economics, 9, 469–479. https://doi.org/10.1016/0022-1996(79)90017-5
Krugman, P. R. (1997). What should trade negotiators negotiate about? Journal of Economic Literature, 35(1), 113–120. https://doi.org/10.2307/2729695
Mccalman, P., Stähler, F., & Willmann, G. (2019). Contingent trade policy and economic efficiency. Review of World Economics, 155(2), 227–255. https://doi.org/10.2139/ssrn.2288596
Melitz, M. J., & Redding, S. J. (2015). New trade modes, new welfare implication. American Economic Review, 105(3), 1105–1146. https://doi.org/10.3386/w18919
Michael, K., & Žigić, K. (2004). Strategic trade policy and vertical product differentiation: intra- industry trade between the developed and developing countries (Working paper No. 230). CERGE-EI. http://www.cerge-ei.cz/pdf/wp/Wp230.pdf
Nie, P. Y. (2014). Effects of capacity constraints on mixed duopoly. Journal of Economics, 112(3), 283– 294. https://doi.org/10.1007/s00712-013-0362-4
Nie, P. Y. (2018). Comparing horizontal mergers under Cournot with Bertrand competitions. Australian Economic Papers, 57(1), 55–80. https://doi.org/10.1111/1467-8454.12053
Ossa, R. (2011). A new trade theory of GATT/WTO negotiations. Journal of Political Economy, 119(1), 122–152. https://doi.org/10.1086/659371
China National Bureau of Statistics. (2018). Report of China National Bureau of Statistics. http://www.stats.gov.cn/
Report of Free Trade Agreement between China and Chile. (2019). http://fta.mofcom.gov.cn/article/chinachile/chinachilegfguandian/201904/40380_1.html
Shimbov, B., Alguacil, M., & Suárez, C. (2019). Export structure upgrading and economic growth in the western Balkan countries. Emerging Markets Finance and Trade, 55(10), 2185–2210. https://doi.org/10.1080/1540496X.2018.1563538
Singh, T. (2010). Does international trade cause economic growth? A survey. World Economy, 33(11), 1517–1564. https://doi.org/10.1111/j.1467-9701.2010.01243.x
Soderbery, A. (2018). Trade elasticities, heterogeneity, and optimal tariffs. Journal of International Economics, 114, 44–62. https://doi.org/10.1016/j.jinteco.2018.04.008
United Nations Statistics Division. (2017). UN Data Report. http://data.un.org/
Waugh, M. E. (2010). International trade and income differences. American Economic Review, 100(5), 2093–2124. https://doi.org/10.1257/aer.100.5.2093
Zhou, H. W. (2010). A Ricardian model of international trade with oligopolistic competition. Journal of International Trade & Economic Development, 19(4), 499–515. https://doi.org/10.1080/09638199.2010.506337