Tariff Protection, Product Differentiation and Market Conduct

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.