Strategic Trade Policy When Domestic Firms Compete Against Vertically Integrated Rivals

30 Pages Posted: 4 Jul 2004

See all articles by Dani Rodrik

Dani Rodrik

Harvard University - Harvard Kennedy School (HKS); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Chang-Ho Yoon

Independent

Date Written: April 1989

Abstract

This paper models the international competition between a domestic firm and its vertically integrated foreign rival. The domestic firm has the choice of developing its own production capability for an intermediate input, or of importing it from the foreign firm at a price set by the latter. In this setting, and under reasonable cost assumptions, the foreign firm will always choose to supply the domestic firm as long as it cannot monopolize the final-good market by withholding supply. A tariff placed on the imports of the input by the home government will be borne entirely by the foreign firm, and will be welfare increasing. When the home government chooses to subsidize the domestic firm's fixed development costs for the input, the optimal subsidy will exceed the total fixed costs required, but will not have to be disbursed in equilibrium. A tariff on the final good will enhance the home firm's profits not only by increasing the costs of its rival, but also by reducing its own input costs.

Suggested Citation

Rodrik, Dani and Yoon, Chang-Ho, Strategic Trade Policy When Domestic Firms Compete Against Vertically Integrated Rivals (April 1989). NBER Working Paper No. w2916. Available at SSRN: https://ssrn.com/abstract=459424

Dani Rodrik (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

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617-495-9454 (Phone)
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HOME PAGE: http://www.ksg.harvard.edu/rodrik/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Chang-Ho Yoon

Independent

No Address Available

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