Tariff Protection, Product Differentiation and Market Conduct

37 Pages Posted: 28 Dec 2016 Last revised: 6 Apr 2017

Xiaolan Zhou

Shanghai University of Finance and Economics

Caixia Shen

Shanghai University of Finance and Economics

Yanfei Wang

Capital University of Economics and Business

Junji Xiao

The Chinese University of Hong Kong (CUHK) - Department of Decision Sciences & Managerial Economics

Date Written: April 5, 2017

Abstract

This paper studies the effectiveness, competition structure and welfare effect of the tariff imposed on imported cars in China’s automobile market. Our empirical findings suggest that the tariff cannot switch entire demand for imported cars to domestic cars: the tariff decreases sales of imported cars by about 0.25 million for half year, among which only 80% is switched to domestic cars, while 20% of the demand is excluded. Therefore, the tariff excludes the demand for imported cars, leading to a huge welfare loss. The reason behind this exclusion effect is the weak substitution between imported cars and domestic cars. Our empirical analysis also provides evidence for collusive pricing among car importers, which is caused by higher product differentiation among imported brands, supporting the theoretical analysis about the negative relationship between product substitutability and collusion sustainability. Furthermore, we show that the tariff is not the main reason for this collusion.

Suggested Citation

Zhou, Xiaolan and Shen, Caixia and Wang, Yanfei and Xiao, Junji, Tariff Protection, Product Differentiation and Market Conduct (April 5, 2017). Available at SSRN: https://ssrn.com/abstract=2890951 or http://dx.doi.org/10.2139/ssrn.2890951

Xiaolan Zhou

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, Shanghai 200433
China
862165903151 (Phone)

Caixia Shen

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, Shanghai 200433
China

Yanfei Wang

Capital University of Economics and Business ( email )

Beijing
China

Junji Xiao (Contact Author)

The Chinese University of Hong Kong (CUHK) - Department of Decision Sciences & Managerial Economics ( email )

Shatin, N.T.
Hong Kong

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